Play the game or pay up

In 2004, in a paper to the Actuarial Society, Rob Rusconi, a self employed, independent actuary, , revealed the high costs levied against retirement provision vehicles, which led to these products under delivering on the eventual maturity values.

One aspect, in particular, concerned penalties levied against the client’s funds where clients effected certain changes which included reducing premiums, surrendering endowment policies or moving retirement funds from one provider to another before the maturity date. These charges became known as Causal Events.

In 2005, an agreement, called the Statement of Intent, was published. It contained details of an agreement between National Treasury and the industry on how these charges would be curbed to ensure a fair outcome to all. The industry agreed to a R3-billion "admission-of-guilt fine” to pay back excessive penalties on both Retirement Annuity members and endowment policyholders. The last progress report on this from the FSB indicated a figure of R1.9-billion having been paid back by 2009.

The regulations giving effect to the statement of intent were amended in December 2006 and January 2009. Despite this, there appears to be different interpretations by various product providers on how causal event penalties should be applied. This was regularly covered in articles in Personal Finance, and finally came to a head in recent determinations by the Pension Fund Adjudicator.

 

These rulings highlighted unfair and unreasonable practices by certain insurers. Where multiple causal events occurred in respect of the same policy, the maximum penalty was levied for each causal event. This, in the view of the Registrar, "…is inconsistent with the spirit, intent and purpose of the Statement of Intent and the Regulations, as well as fair outcomes for customers in terms of Treating Customers Fairly (TCF) principles…”

In June 2013, a draft directive, published by the Registrar of Long-term Insurance, called for comments by July 31 2013.

The purpose of the Directive is twofold:

- To clarify the maximum causal event charges that may be deducted and, very importantly, to do so in a manner consistent with the purpose of Part 5A or 5B of the Regulations issued under the Long-term Insurance Act.

- To provide the Registrar’s view on applying Parts 5A and 5B of the Regulations made under section 72 of the Act ("the Regulations”) for regulatory purposes.

Part 5A of the Regulations applies to policies where a causal event occurred on or after 1 January 2001. Part 5B of the Regulations provides for maximum causal event charges in respect of investment policies entered into after 1 January 2009.

One of the principles in the draft directive, applicable to future penalties, stipulates that "the insurer must ensure that the cumulative effect of multiple causal event charges during the life of a policy does not result in the policy’s investment value at any time being reduced by a greater proportion than would have been the case if, at the time of the first causal event, the maximum causal event charge was deducted.”

The Regulator’s annoyance with this matter is apparent from this comment: "The Regulations determine the maximum charges that may be charged on the occurrence of causal events. Insurers are reminded that they are not obliged to charge the maximum charges.”

The directive further proposes to address past anomalies by requiring "Insurers that have previously applied Part 5 of the Regulations in a manner inconsistent with the Regulations and this directive” to adjust the investment value of the policy in accordance with these principles.

If implemented, this could have a far greater impact than the "fines” imposed after the Statement of Intent was signed.