Old Mutual comments on possible misconceptions created by PFA's media release

01 June 2006 Stephen Bowey, Chief Communication Officer

The media statement "SMOOTHED BONUS PRODUCT UNDER SCRUTINY" released by the Pension Funds Adjudicator (PFA) on 29 May to the media warrants comment because:

It criticises smoothed bonus policies as a product type based on what appear to be incorrect perceptions;

It positions as invalid actions, which we are advised, are fully in accordance with the legal rules of our common law, and with the provisions of the Long-term Insurance Act.

Old Mutual has referred the determination concerned to its lawyers for purposes of preparing an appeal to the High Court.

Old Mutual would also like to comment on some of the serious misconceptions that could be created by the PFA's media statement, which could lead the public to act inadvisably and to their detriment.

Bonus Stabilisation Account - surplus belongs to policyholders, not to shareholders

Steven Levin, Old Mutual's Head of Retail Products, today said that in the case of Old Mutual's Smooth Bonus portfolio, there is a very clear and strict distinction between the assets managed on behalf of policyholders and the fees to which shareholders are entitled.

"All these assets are separately maintained and managed on behalf of policyholders, and bonuses are declared in a smooth fashion. This results in an excess or shortfall, at any point in time, between the value of the assets and the value of the policy built up for clients", says Levin.

He says this surplus or shortfall, known as a Bonus Stabilisation Account, (BSA), belongs entirely to policyholders. "Shareholders are only entitled to a fee on the value of the assets to cover the costs of the company and to reward them for the risk they take in covering a shortfall in the BSA that can arise in extreme market conditions."


Market Level Adjusters (MLA's) - benefit policyholders as a whole, not shareholders

Levin says it stands to reason that when the BSA is very negative, allowing clients to exit voluntarily prior to pre-selected maturity dates unduly favours these clients over those who stay.

"For this reason Old Mutual reduces a client's accumulated fund value on 'surrender' or early maturity (not on normal maturity or on death), but only during periods of extremely depressed markets. This is what happened in Mr Mungal's case. The 10% reduction that applied in Mr Mungal's case should be seen against a market fall of 30% over the 12 months to March 2003."

The PFA's media release also questions the way in which insurers handle the situation of significantly positive BSA's.

"In the case of strongly positive BSA's, Old Mutual's practice is to increase the interim bonus rates that apply to all claims prior to the next bonus declaration," says Levin.

"This means that existing clients benefit from the positive BSA that accompanies a rising market. The smoothing process works well within reasonable levels of market volatility. MLA's and changes to interim bonuses are used to deal with positive and negative market conditions outside the "normal" range of market volatility."

He says it has to be emphasized therefore that the MLA exists only to promote fairness between policyholders. "If it were to disappear, it would not affect Old Mutual's profitability, but would allow investors with specialised knowledge to profit unfairly at the expense of other policyholders."

Levin points out that the determination of bonuses and MLA's are not arbitrarily determined by the insurer, but in terms of objective actuarial principles in accordance with the requirements of the Long-term Insurance Act and Old Mutual's Principles of Financial Management laid down at the time of demutualisation.

Transparency - the facts

As administrator of the Fund, Old Mutual is tasked to ensure that the Fund's members are kept informed of the decisions of the trustees and the relevant values of their benefits in the Fund, in compliance with the Financial Services Board's PF Circular No. 86.  The Circular covers the important aspect of disclosing information to the Fund's members concerning their benefit values and the investment portfolio which the member has selected. 

Old Mutual was at all relevant times compliant with its duties of informing members, and has issued Benefit Statements to the Fund's members, including Mr Mungal, which recorded both the "fund value" and the "cash value" of the relevant policy on an annual basis.

According to Old Mutual records, Mr Mungal was also informed of the impact of the MLA and confirmed that he wanted to effect the early withdrawal on that basis, and for that amount, before the surrender of the policy was processed.


Quick Polls


Each year ordinary consumers and their financial and wealth advisers flock to dozens of asset manager ‘outlook’ presentations to find out about economic and investment trends, and the next ‘hot’ company. What do you want asset managers to share during these events?


Asset allocation strategies
Big picture investment themes and how to position portfolios for them
Investment methodologies and historic fund yields
Share tips by the score
fanews magazine
FAnews June 2022 Get the latest issue of FAnews

This month's headlines

A free smoothie does not make a loyal customer
Consequential loss policy court cases
Everything you need to know about death, disability and severe illness cover post-emigration
Are advisers doing all they can for clients’ portfolios?
Financial advisers need help - navigating the complex ESG fund environment
Subscribe now