PFA questions TCF principles in causal event charge

03 August 2017 Myra Knoesen
Ms Muvhango Lukhaimane, the Pension Funds Adjudicator (PFA)

Ms Muvhango Lukhaimane, the Pension Funds Adjudicator (PFA)

Most of the determinations that we receive involve members of the public alleging that they have been unfairly treated. With the effects of regulation such as Treating Customers Fairly (TCF) in the industry, treading carefully becomes a basic instinct because one can only assume that the determinations will, majority of the time, be in favour of the public.

Settlement dissatisfaction

Ms Du Toit, (the complainant) claimed she was unhappy with the quantum of the causal event charges imposed on her retirement annuity policy when she decided to transfer her fund value to another investment product. 

She applied for and was admitted to membership of Central Retirement Annuity Fund (the first respondent). The policy commenced on 1 March 1995 with a contractual maturity date of 1 March 2028. The policy was subject to an initial monthly contribution of R80.81 subject to an annual increase of 10% on the plan. 

The policy was subsequently converted to a newer generation plan and the monthly contributions increased to R1 000, subject to annual increase at inflation rate.

On 23 February 2017, Du Toit requested a quotation to transfer the proceeds of her retirement annuity policy to Allan Gray Retirement Annuity Fund. She was provided with a quotation which reflected that an early termination charge of R41 193.96 (11.82% of fund value) would be levied on her fund value of R348 397.75.

Du Toit contended that her fund value was drastically reduced due to high administration or termination fees. She was dissatisfied with the fact that an early termination charge of R41 193.96 was levied when she decided to transfer her funds to a cheaper administrator. She indicated that she should have the freedom of choice to move her funds to another fund that offers cheaper administration fees. 

She indicated she had lost interest on her investment and her funds were not growing due to high fees. Thus, she stated that she should be able to move her funds to another fund without penalties. She submitted it was not her problem if the second respondent paid commission upfront as she was not told that she was bound by the high fees. 

Causal event charges

The second respondent submitted that as confirmed in the policy contract, it recovered alteration charges from a member’s fund value by cancelling units to the value of the fee when a member took early retirement benefit, reduced the recurring contributions or stopped payment of the recurring contributions. 

It averred that most of the expenses were incurred at the start date of the plan or when the contributions were increased. The expenses were recovered by means of charges which were levied over the term of the plan. 

When the plan charges were calculated, it was assumed that the contractual contributions would be paid up to the end of the policy term. In the event that the premiums were stopped or the plan was discontinued, it would no longer be able to recover these costs from future charges. 

The second respondent also indicated that these charges were disclosed to Du Toit in the product quotation that she accepted when she signed the application form. It submitted that Du Toit stopped the payment of contributions prematurely and the policy became paid-up. This resulted in a causal event. The second respondent further submitted that it subscribed to the principles of TCF. It submitted that Du Toit was appropriately informed before, during and after the time of contracting. 

Effect of intentions

In her determination, the Pension Funds Adjudicator (PFA), Ms Muvhango Lukhaimane said

Du Toit was provided with quotations illustrating the charge that would be imposed in the event that she ceased payment of contributions or transferred her fund value to another fund prior to the contractual maturity date. 

She should have been aware of the effect on her fund value if she transferred her policy value to another fund prior to the contractual maturity date as explained in the policy quotation and Central Retirement Annuity Fund’s rules. 

In addition, on 1 December 2006 the Minister of Finance promulgated regulations in terms of the Long Term Insurance Act (LTIA) that stipulated maximum causal event charges in respect of causal events that occurred on or after 1 January 2001. 

She said the second respondent provided a breakdown of Du Toit’s fund value and the amount imposed as a causal event charge. 

“This Tribunal is satisfied that the causal event charge levied or to be levied by the second respondent on the complainant’s fund value for early termination of the policy was lawful in terms of Regulation 5 of the LTIA and within the limits of 30% permitted in terms of the provisions of the LTIA and the Statement of Intent,” says the Pension Funds Adjudicator. 

The final say
Ms Lukhaimane added that although lawful, the actions of the respondents could hardly be described as being anywhere near the letter and spirit of the TCF principles. 

Ms Lukhaimane said the following TCF outcomes were applicable in this matter: customers are given clear information and are kept appropriately informed before, during and after the time of contracting and customers do not face unreasonable post-sale barriers to change product or switch provider. 

“The respondents should actually refrain from quoting TCF principles when levying causal event charges as the charges are obscure and cannot be translated into value for members of retirement annuity funds. Though a settlement was reached it does not in any way address the unfairness and absence of value that often accompanies the levying of causal event charges. This Tribunal has on countless occasions called for the implementation of the Retail Distribution Review (RDR). Although this will still not remove the obscure charges, it is at least a long overdue development that will ensure that entities like the respondents deliver on what their products promise. Thus, this Tribunal is not satisfied that the levying of causal event charges in this matter is in accordance with the two TCF outcomes stated above,” said Ms Lukhaimane while dismissing the complaint. 

Editor’s Thoughts:
The respondent stated that Du Toit was appropriately informed before, during and after the time of contracting. Do you believe the respondent went against TFC principles? If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me.


Added by Myra, 03 Aug 2017
Hi Jeremy,

Thank you for your comment.

With particular emphasis to your comment -"TCF Has not been embraced by any insurer" - in my opinion I believe there are insurers who have embraced TFC. When reading these determinations it is always good to remember that one bad apple does not spoil the bunch in other words, one person's mistake should not paint the industry in a bad light. Yes TCF principles where questioned in the determination but as controversial as some may say, the truth is we can all learn a lesson or two from these determinations.

People want to see what mistakes others are making so that they can learn from it.

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Added by JEREMY, 03 Aug 2017
Not only is the insurer guilty of obscure terms and conditions, the blame will be directed to upfront commissions paid to the intermediary. Not only is the commission portion of the levy very small the insurer would have clawed back some of this commission. TCF Has not been embraced by any insurer and they persist in generating obscure quotes with many inaccuracies.The PFA needs to whip out a big stick for insurers.
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