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Some questions about S14 transfers, call centres, costs, calculations and blank client declarations, section 7C, are answered by Rex Thomlinson, deputy CE at Liberty Life.

Here is the story thus far, according to a reader...

My client entered into a Fedlink RA, for 10 years at a premium of R500 per month in their International portfolio.
 
In December 2005 he requested me to initiate a transfer of the proceeds to Allan Gray platform. Various e-mails and telephone conversations to the then Capital Alliance Call centre intermediaries as well as their team leader were made with no success.
 
Eventually we were instructed to correct his surname from old ID to new ID first, and then we can proceed with S14 transfer. This was done and the official request together with the required documents was submitted to Capital Alliance (now Liberty) on the 27/10/2006.
 
On the 13/11/2006 I received by fax an elementary spreadsheet reflecting the net amount after deducting ambiguous amounts of costs as well as a blank client declaration which we need the client to sign and return to them for processing.
 
On perusing the various items, most seemed to be in line with a normally acceptable declaration. Except for one paragraph - the third last paragraph where the client totally indemnifys the Transferor for any loss whether it is directly or indirectly the result of 'any wilful or negligent conduct or omission by any party'.
 
According to our reader, their interpretation therefore is that Liberty thus has Carte blanche with their calculations, which according to a company representative I quote, 'is actuarially intricate calculations which is too difficult to explain to the average intermediary.'
 
So how on earth can a Broker endeavour to continue to embrace Section 7 C of the General Code of Conduct with regards transparency to costs if the Service Provider continues to omit full details that are required for full disclosure to the clients.
 
And then there was the question of the asset swap charges, changes and what formulae are being used as there are examples of asset swap fees ranging form 3 to 5%.
 
According to our reader, it appears that if a fund is performing well, a lower 'exit fee' will apply than when a fund is under performing. Apparently the actuaries review this periodically.
 
 It also appears that the reader couldn't establish a pure definition or obtain satisfactory explanation of how the growth on unrecovered expenses is calculated and applied.
 
It does appear that the reader was informed that the expenses were 'rolled-up' as per the old Fedsure calculations at a fixed rate of approximately 16%...

According to Rex Thomlinson, in order to comply with the requirements for a Section 14 transfer, it is correct that specific documentation needs to be completed.

The trustees, who bears the ultimate authority for approving section 14 transfers, require in addition the following declaration (the third last paragraph), which reads as follows:

"I will not hold the..........(Transferor Fund Name), its trustees and Liberty life liable for any costs, damage or loss whatsoever that I may suffer, directly or indirectly, due to transferring my interest to the other fund, as a result of any willful or negligent conduct or omission by any party."

Thomlinson says that the purpose of this declaration is to ensure that the fund affecting the transfer will not be responsible for any losses that may arise because of the transfer.

In other words, the transferring fund needs to ensure that it will not be liable for any losses arising once the monies have been transferred to the new fund.

In terms of the investment value of the retirement annuity at the time of the Section 14 transfer, Thomlinson says that value relating to this type of investment must, amongst other requirements, meet the requirements of the Long-Term Insurance Act.

The insurer cannot determine the investment value in a "carte blanche" manner, but must apply sound actuarial rules in determining the calculation of the investment value at the time of transfer.

In general terms retirement annuity contracts operate over a total expected contractual term and the expenses incurred by the insurer are recouped over that contractual term.

Thomlinson then touched on the actual expenses on the policy, which include commission, the policy acquisition costs that are debited to the policy upfront, and other management, administration, renewal and distribution expenses.

In addition, interest or finance charges (currently 10%) are charged to the debt balance in the expense account. These various expenses are recouped by way of debits to the investment account of the contract in accordance with the charges, which are set out in the policy document.

So what about early cessation of the contract? Well, Thomlinson says that if the contractual term ceases prematurely, because the contract is made paid up, or there is an early retirement, or there is a Section 14 transfer, then the insurer is not able to recoup its full expenses over the full contractual term.

These expenses are then recovered as a once off premium cessation charge. These unrecouped expenses are deducted from the investment value of the contract at the date of the Section 14 transfer.

Please bear in mind that this figure may change slightly, depending on the precise date when the Section 14 transfer is eventually concluded, that is after the transferee and transferor funds have exchanged the necessary documents and the Financial Services Board have approved the transfer.

Thomlinson says that the unrecouped expense calculation is intended to be fair and reasonable for all policyholders and is not simply an arbitrary expense.

You may be aware of the recent decision of Holloway in the Cape, where the Courts have accepted that this is a fair way for insurers to deal with these circumstances.

On the question of the asset swap charge, the correct charge is 3%. This charge is already taken into account in the fund value.

Editor's comments:

* If nothing else Liberty live up to their word and respond when they say they will.
* What is interesting though is that the product provider's clients are not getting the responses and the service they rightly should expect, and thus they turn to the media. This is not a good sign for the suppliers.