When purchasing a retirement annuity, an investor is faced with a myriad of options. The investor must first choose between the different life insurance companies before homing in on the appropriate product and mix of options within that product. The consumer inevitably relies on a financial adviser or intermediary to assist him in making the correct choice.
The difficulty in choosing one retirement annuity over another is compounded by the vast array of variables that impact on the maturity value on the annuity. Assumptions have to be made as to expected investment returns and levels of inflation over a number of years. Further difficulties stem from concerns over whether individual insurance companies are equally transparent when providing indicative values such as reduction in yields (RIY) and projected maturity values (PMV).
The Life Offices' Association (LOA) has taken various steps to level the playing field in this regard. Initially they advocated the use of PMVs as an illustrative maturity value. The LOA stipulated industry norms standards for the low and high return scenarios use in PMV illustrations... More recently, the LOA announced that the PMV would be done away with.
Product comparison would now focus on RIY as introduced in the LOAs Code on Policy Quotations introduced in 2005. FAnews Online published a newsletter titled "Using reduction in yield to guide investment decisions" to investigate the usefulness of RIY in making an investment decisions. In today's newsletter we take a look at some of the reader comment received in response to this newsletter. Our intention is to further the debate on reduction in yield and the decision to remove projected maturity values from policy quotations.
Our first response is from Gerhard Joubert, CEO of the Life Offices' Association:
"Your newsletter published on Wednesday 22 August 2007 raised a number of concerns around the decision by the life industry to remove projected maturity values from quotations and policy documents by early next year.
"You made the point that financial advisers are not in a position to estimate maturity values on savings and investment policies, because they have no control over the investment and expense decisions made by the insurance companies in the management of their clients' funds.
"You also stated that financial advisers were using the projected maturity value as a simple tool to demonstrate to clients which retirement product was likely to provide the best investment return over the investment period."
[Click here for the Gerhard Joubert's full response]
FAnews Online readers have also provided interesting comment. The majority of readers are unhappy with the scrapping of the PMV. This unhappiness does not stem from a desire to abuse the illustrative values in making product sales. Advisers believe that the illustrative value serves a purpose as an indication of the policy issuers expectation of performance under different growth scenarios. No stakeholder is in a better position to provide this estimate than the life insurance company.
Respondents believe that the RIY number is useful only as far as it is applied in the same way by all insurance companies. There needs to be a guarantee that the RIY number is calculated on the same basis with no opportunity for manipulation by differentiating or re-labelling costs to create a more favourably RIY number.
[Click here for some of our reader responses on PMV and RIY]
We welcome further comments on this subject and on the quotation process in general.
Editor's thoughts:
There are obvious difficulties in providing 100% accurate maturity values on retirement annuities. Part of the debate goes around who is best positioned to provide this estimate. Is it the insurance company as the financial adviser contends, or should this estimate be left in the hands of the adviser, as the LOA contends? Should you wish to further the debate on projected maturity values or reduction in yield, please forward your comments to gareth@fanews.co.za
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