19 October 2005 Angelo Coppola

The pension funds adjudicator yesterday (18.10.05) issued the 69th ruling involving a RA Fund and exposed another concerning practice of interest charged by the Insurer on the loan account.

The complainant joined the MM Retirement Annuity Fund, which is administered by the Momentum Group Limited (“Momentum”), on 1 July 2003.

After having made recurring monthly contributions totaling R24000, cash flow problems in his business forced him to cease making contributions with effect from September 2004.

The insurer debited the following fees to his investment account: a “policy fee” (R240), an “alteration fee” (R250), “premium charges” (R1 050-85), a “portfolio fee” (R140-40) and an amount towards the “amortization of the commission loan account” (R10 554-19).

As at 9 May 2005, the value of his investment was R13 750.

The fund and the administering insurer purported to rely on the provisions of the rules and the key features document authority for deducting the said amounts.

The Adjudicator found that the rules do not authorize the deduction of any of the fees and charges referred to.

He went on to find that the “policy fee” and the “premium charges” are referred to in the quotation document, and that the administering insurer was entitled to debit the complainant’s account therewith.

Insofar as the “alteration fee”, the “portfolio fee” and the amount towards the “amortization of the loan account” are concerned, he found that they are not provided for in either the quotation document or the key features document.

Both the fund and the insurer were jointly and severally ordered to credit the complainant’s investment account in the fund with the amount of R10 944-59, together with interest thereon at the rate of 15.5% per annum.

The Adjudicator was concerned by the fund trustees’ turning a blind eye to the practice of the insurer of paying upfront commissions to brokers and then opening loan accounts in respect of the amount paid to the broker as commission.

Interest of 10 to 12% per annum is charged on the loan, which, together with the balance of the loan account, is recovered by canceling units (which are purchased by the member’s monthly contributions) in the member’s investment over the term of membership. According to Momentum, on the facts of this case, had the member continued contributing until his selected retirement date, it would have recouped R22 820 on an unsolicited loan of R8460.

Thus, the member would have paid R14 180 in interest.

The loan account is opened without the knowledge of the member, and the member is not given an option to either repay the commission as a lump sum from her own funds or as and when it arises on a monthly basis.

This aspect of the ruling was referred to National Treasury, Registrar of Long Term Insurance and Pension Funds.

The adjudicator further pointed out that since membership does not cease when a member prematurely ceases contributing to the fund, and the commission is meant to be recovered over the term of membership, there is no authority in either the rules or the policy document for the acceleration of the recovery of the commission amount upon the premature cessation of contributions.

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