Moonstone: Causal events and the SOI

Concerns expressed by readers on penalties being levied by Life Offices where changes are effected to long-term savings plans were also echoed in findings of the Pension Fund Adjudicator.

The basis for determining the extent to which penalties can be charged was laid by the Statement of Intent (SOI) which was published in December 2006, and was subsequently included in the Long-Term Insurance Act.

Readers may recall that the initial concern raised by National Treasury (NT) was with what they termed “early termination values.” The scope of these values were extended considerably, with the LT Insurance Act making provision for no less than seven causal events, each of which qualifies for a fee to be levied against the fund value at the time.

In the original discussion document on Long-term savings products, NT pointed out that changing demographics and other social and economic events called for a new dispensation, quoting for example people migrating between jobs more easily while others were being retrenched in the wake of economic conditions.

Further to this, we had changes in the economy, as well as to legislation, resulting in people being able to effect more changes than originally envisaged in the SOI, section 14 transfers being one of the major events.

With clients being able to make up to seven changes which would qualify under the definition of “causal events”, it is imperative that some safeguards have to built in to protect client funds – this was after all the main reason for the SOI.

The new regulations in the LT Insurance Act does provide for the following:

“The administration charge must, if necessary, be reduced proportionally so that the investment value immediately prior to the causal event, less the causal event charge and administration charge, is not smaller than 70% of the investment value immediately before the causal event.”

There is however no limit on the number of causal events, which, if my interpretation is correct, could lead to clients losing more than before the SOI, which basically defeats the purpose of the exercise, not so?

In one of the determinations by the PFA the client first reduced the premium from R3 000 to R750, then made the contract paid-up. In both instances, heavy penalties were levied, causing the PFA to remark that the client was in fact being penalised for trying to keep the annuity going.