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PFA orders funds administrator to refund termination charges

30 January 2014 Muvhango Lukhaimane, Pension Funds Adjudicator

The “dishonest” underwriter and administrator of a retirement fund has been ordered by the Pension Funds Adjudicator to pay into a complainant’s paid-up retirement annuity policy, all termination and causal event charges levied on the complainant’s fund value.

Ms CE McDonnell complained to Ms Muvhango Lukhaimane that penalty charges were levied on her retirement annuity when she made her policy paid-up, despite Liberty Life Ltd (the second respondent) giving her a prior undertaking that no penalties were going to be charged if she terminated.

The complainant applied for and was admitted to the membership of Fedsure Retirement Annuity Fund on 1 October 1995 with the intention to remain a member until 1 October 2026, a period of 31 years. Fedsure was subsequently acquired by Capital Alliance which was also taken over by the second respondent.

On 9 May 2011, the complainant, with the assistance of her financial advisor, approached Lifestyle Retirement Annuity Fund (the first respondent) and the second respondent to enquire whether or not there would be penalties if the complainant were to make her retirement annuity paid-up or if she were to transfer it to another fund. The respondents informed her there would be no penalties charged.

Relying on the second respondent’s response that no penalties were going to be charged, the complainant sent a letter indicating that she was making her retirement annuity policy paid-up and that the second respondent should cease deducting premiums from her account.

The respondents failed to cancel this policy and continued to receive premiums from the complainant’s bank via a stop order. The complainant discovered in January 2013 that her retirement annuity was not cancelled as per her instructions. On instructing the respondents to terminate the policy as initially instructed, the respondents effected termination penalties on the complainant’s fund value which reduced the complainant’s fund value.

Responding on behalf of both respondents, the second respondent said when the complainant instructed them to make her policy paid-up, her investment value was R80 112.32. It submitted that a causal event charge of R16 758.92 (20.92%) was to be imposed and her net fund value thereafter would be an amount of R63 353.40.

The second respondent submitted that in response to enquiries made by the complainant, it had confirmed that "there is no penalty for making the policy paid-up”. It admitted that due to an administrative error on its part, the policy was not made paid-up when the complainant initially requested, but was made paid-up only on the second instruction.

It submits that it was at this stage that the complainant raised a dispute with it, contesting the charging of the causal event charges as against its earlier statement that no penalties were going to be charged.

It submits that it made an offer for an amount of R2 000, "not as a concession to deducting the unrecouped expenses, but for the poor service rendered” in failing to terminate the complainant’s retirement annuity when she initially instructed that this be done. However, this was rejected by the complainant as the penalties suffered were around R20 000.

The second respondent admitted that the response that was sent to the complainant’s advisor on 31 May 2011 reflected that that there was no penalty for making the policy paid-up. It further submitted that prior to the query by the advisor and its response on 1 April 2011, it provided the advisor with a net paid-up value for the respondent which then was R60 009.00.

It submitted that this was the complainant’s net fund value after the unrecouped expenses were deducted. It submitted that what it meant when it indicated that there would be no penalty charges, was in reference to the surrender penalties and not to the deduction of unrecouped expenses. It submits that this was in line with its policy document.

In her determination, Ms Lukhaimane said the second respondent was being "disingenuous” in its explanation of what was "an unequivocal statement” to the complainant that no penalties were payable.

"In its own response, the second respondent is at pains to try and distinguish the difference between penalty charges and unrecouped expenses.

"The reason why it is unable to do so is because there is none. This can also be observed from the second respondent’s conduct following the complainant’s complaint to it, namely, its offer of an amount of R2 000 as recognition of the fact that it had erred by providing the complainant with incorrect information contrary to the first respondent’s rules and regulations.

"The fact that the second respondent wrongly informed the complainant that there were no penalties charged for cessation of contributions, whereas in fact there were, is accepted by this Tribunal.”

Ms Lukhaimane said she was satisfied that charges sought to be levied by the respondents (including charges for marketing, distribution and acquisition costs), were within the law.

"However, regardless of the fact that the respondents were allowed to deduct these penalties from the complainant’s fund value, this did not address the negligent misrepresentation made to the complainant by the second respondent, to her detriment.

"The second respondent as the administrator and underwriter had the necessary authority to inform the complainant on whether or not penalties were applicable,

"The second respondent negligently represented to the complainant that no penalties were payable if the complainant was to cease paying contributions,

"The representation was relied upon by the complainant in deciding to cease paying contributions,

"The complainant’s reliance on the second respondent’s representation was to her detriment in that she committed to increasing her premiums in another retirement policy while she also incurred the penalties in regard to her policy with the first respondent.”

Ms Lukhaimane ordered the second respondent to pay into the complainant’s paid-up retirement annuity policy, all termination charges and/or causal event charges levied on the complainant’s fund value by the first respondent when she ceased paying premiums.

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