Members must be better informed about causal event charges

04 November 2015 Muvhango Lukhaimane, PFA
Muvhango Lukhaimane, Pension Funds Adjudicator.

Muvhango Lukhaimane, Pension Funds Adjudicator.

The Pension Funds Adjudicator has dismissed a complaint about a causal event charge proposed by Sanlam Life Insurance Limited in the event of a decrease in the premium.

Muvhango Lukhaimane also urged the retirement fund industry to educate and properly inform members about causal event changes.

Causal event charges are levied if the policy is made paid-up or if the premiums are reduced in order to recover un-recouped expenses incurred upfront.

Ms T Naidu-Lewin of Pretoria complained that a causal event charge was to be imposed by Sanlam Life Insurance Limited (second respondent) on her value in the Central Retirement Annuity Fund (first respondent) should she decide to decrease the current monthly contribution.

The complainant was admitted to membership of the first respondent by virtue of being issued with a retirement annuity policy on 1 February 2011.The initial monthly contribution was R500 per month.

In December 2011, she left Pretoria to work overseas for four years. Prior to leaving, she decided to increase her monthly contribution to R2 000 per month (with a 10% yearly increase) for a period of four years.

The monthly contribution increase took effect from 1 January 2012. She further submitted that her decision to increase the monthly contribution for the duration of her posting was solely based on the fact that she would be able to pay higher contributions as a result of her overseas posting.

In May 2015, she contacted the second respondent to ask for advice on decreasing her monthly contributions with effect from 1 January 2016 as she would no longer be able to afford the monthly contribution of R2 928.20.

She was advised by the second respondent that should she wish to decrease her monthly contribution to R500 a month, there would be a penalty of R9 281.95 that she would have to incur for decreasing the monthly contribution. The complainant’s fund value would reduce from R120 349.59 to R111 067.64.

The complainant believed it was unfair that if she wished to change her monthly contributions, t she should have to pay a penalty.

The second respondent submitted that the alteration charge to be levied was not a penalty as indicated by the complainant. It was charged in accordance with what had been stated in the policy.

The second respondent further submitted that most of the expenses with respect to policies were incurred at the commencement of the policy (“upfront costs”) or when the premiums or contributions were reduced or stopped. These upfront costs were recovered by means of charges imposed over the term of the policy.

The purpose of the causal event charge was to recover the expense of doing the alteration on the policy and to partly recover the loss, resulting from the alteration, of future policy charges that were required to pay for the initial expenses already incurred on the policy. If the contractual payments were to be continued until the chosen retirement date, these expenses would have been recovered by the charges.

The second respondent also stated that the regulations issued under the Long-term Insurance Act, 52 of 1998 (“LTI Act”), confirmed the application of actuarial rules to policies. The deductions and charges were levied in accordance with these actuarial rules.

In her determination, Ms Lukhaimane said that in deciding on the fairness and reasonableness of the causal event charge that would have been imposed by the second respondent, her office engaged the services of an independent actuary.

The actuary considered the first respondent’s rules, the policy terms, the provisions of the Act and LTI Act, generally accepted actuarial principles and the regulations before reaching a conclusion on the reasonableness of the causal event charge.

The actuary concluded that the causal event charge of R9 281.95 (7.71% of the fund value of R120 349.59) that would be imposed by the second respondent on the complainant’s fund value in the first respondent should she decrease the monthly contribution from R2 928 to R500 per month was within the 30% limit stipulated in the regulations of the LTI Act and therefore, was fair and reasonable.

“Therefore, after careful consideration of the facts placed before this Tribunal, it is evident that the second respondent acted in accordance with generally accepted actuarial practice, the provisions of the rules, the provisions of the policy documents, the provisions of the LTI Act and the regulations.

“This Tribunal accordingly finds that the causal event charge that would be imposed by the second respondent on the complainant’s fund value was not unfair and unreasonable,” said Ms Lukhaimane, in dismissing the complaint.

She added there was a dire need for service providers in the retirement fund industry to educate and properly inform members about the permissible costs and charges to be levied on those members who reduce or cease their contributions to a retirement annuity fund or transfer their savings to another fund before the agreed maturity date.

“Often, difficult financial circumstances lead to members of retirement annuity funds reviewing their continued membership of such funds. This eventuality is presently not taken into account by the service providers who underwrite these retirement annuity policies.

“Inasmuch as this Tribunal understands and accepts that the life assurers who underwrite these retirement annuity policies need to recoup the upfront costs incurred by deducting causal event charges, what is problematic is the erosion of the members’ benefits without the service providers explicitly disclosing these penalties and how they are calculated to members,” said Ms Lukhaimane.



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