Moonstone: New LOA code on living annuities

Hereunder is an excerpt from the LOA’s notice on the new Code. The full document can be downloaded here.

The LOA’s new Code on Living Annuities (CLA) will replace the current one and becomes effective from 1 February 2009.

The CLA is intended to provide industry standards so that living annuities are responsibly marketed and administered and that a living annuity fulfils its originally intended design requirements whilst striving to produce a level of income that is sustainable for life.

Each member office must ensure that all living annuities administered by them comply with the CLA. Each member office must take whatever steps are necessary to ensure that intermediaries also comply with the CLA.

SARS’ Practice Note RF 1/96 subjects a South African living annuity to the following requirements:

· The pre-defined minimum and maximum levels of income govern the rate at which income can be drawn down.

· The income level must at all times produce a meaningful annuity for life.

The CLA recognises that to the extent that advice is required by a client, the financial adviser (independent or tied) fulfils the primary role in advising on underlying investments, the rate at which an annuity is drawn down, and the implications of selecting or changing the draw-down percentage. The administrator provides a perfunctory function in implementing a decision that requires skilled advice or expertise.

The CLA therefore aims to ensure that administrators act in a responsible manner by putting in place product standards that will help to mitigate the risk of living annuities being exhausted in the lifetime of the annuitant without providing advice.

Provision is made for all product providers to comply with the following standards:

Standard 1: Minimum disclosure at point of sale

Each member office must ensure that the specified or similar wording is seen by and signed off by the client at some point during the sale of any living annuity. Apart from this, general disclosures are to be made to policyholders on transferability and convertability of living annuities.

Standard 2: Appropriate drawdown for ongoing business

Member offices are obliged to communicate to all their clients on at least an annual basis the appropriate level of drawdown as determined in Standard 1 above. Member offices are required as a minimum on the client’s anniversary date to provide warnings on statements such that the individual client is able to ascertain whether or not their most recent income selection places their annuity at risk.

Standard 3: Appropriate Investments

To ensure that undue investment risk is not taken at the point of retirement, administrators must ascertain whether the assets selected by each of their living annuitants comply (at an individual member/policy level) at the inception of the investment and at any subsequent switch, with Regulation 28 of the Pensions Fund Act no.24 of 1956.

If these limits are breached, the administrator must provide a warning to the client that the asset composition falls outside the recommended asset composition of the LOA or LISPA and that due care should be taken in proceeding with this asset composition. This standard will only apply to new investments as at the effective date.

Standard 4: Industry based analysis and monitoring

Administrators are required at the end of each calendar year to report a living annuity status report (to the LISPA Market Conduct Committee or the LOA’s SCOP). These individual reports will be made available to the applicable regulatory bodies for scrutiny if requested.