PFA: Complaint dismissed about commission levied despite no broker advice

21 October 2011 The Office of the Pension Funds Adjudicator
Dr Elmarie de la Rey

Dr Elmarie de la Rey

The Office of the Pension Funds Adjudicator has dismissed a complaint that a broker
commission was being levied although no advice was being received from a broker.

Dr Elmarie de la Rey, the acting Pension Funds Adjudicator, ruled that older generation insurance policies did not allow for the policyholder to be credited for commission not paid.

The complainant Shaun van der Merwe said he managed his investment directly with Old
Mutual Life Assurance (SA) Ltd (second respondent) and as such, there should not be a
broker fee deductable from his investment in South African Retirement Annuity Fund
(first respondent).

The complainant joined the first respondent on 1 November 1985 and had a monthly recurring contribution of R42.10. The complainant issued an instruction to the second respondent to increase his monthly contribution with effect from 1 April 2004, 1 February 2005 and 1 July 2006.

The second respondent carried out the complainant’s instructions. Subsequently, the complainant noted that every time he increased his monthly contributions, there was a fee deducted from his fund credit for broker commission.

The complainant submitted that since he manages his investment directly with the second respondent, there should not be a broker fee deductable from his investment.

In response to a query from the Office of the Pension Funds Adjudicator, the second respondent submitted that the complainant’s policy was issued under its Flexi Range of products. These “older generation” products did not provide a prospect of variable commission, a concept introduced when the new generation products were developed.

In terms of the newer generation products, the benefit of commission not paid to an intermediary is credited for the direct benefit of the policyholder.

The nature and design of the older generation products did not make provision for the commission content to become a negotiable item. As the commission was an invariable feature of this product range, it was not possible to adjust or remove the commission payable, regardless of the circumstances.

Therefore, despite the fact that the complainant did not use the services of a broker, it did not necessarily imply that the commission would be waived, or that he would become entitled to the commission concerned, the second respondent claimed.

In her determination, Dr De la Rey said there were various costs that an insurer incurred at inception of the policy and during its maintenance.

These costs included marketing and distribution expenses; expenses incurred during the issuing the policy documents; and ongoing renewal expenses,

“In order to render policies actuarially sound, it is necessary that insurers levy charges against the investments made by the policy holders in order to recover the expenses.

“Such charges are accordingly not deducted at the same frequency as the expenses were incurred.

“Policies generally provide for the deduction of specified charges over the full term of the policy on the assumption that it will endure to term.

“The deduction of commission is permissible in terms of part 3 of the regulations of the Long-term Insurance Act No 52 of 1998.

“Upon inception of the complainant’s policy, the second respondent paid the broker fee upfront over a period of two years on behalf of the complainant.

“Thus, the second respondent has to recoup this cost from the complainant throughout the term of the policy as part of the monthly premium levy.”

Dr De la Rey said the second respondent could not cancel the “broker fee” deducted on the complainant’s investment because in effect the complainant owed the second respondent.

She accepted that the nature of the older generation policies, such as the complainant’s, did not make provision for the commission to be a negotiable item, making it impossible to adjust or remove the commission payable, regardless of the circumstances.

Thus the complaint was dismissed.

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