The S14 Transfer debate will continue next year
One of the most contentious issues raised by the long-term insurance industry during the year was the treatment of Section 14 transfers. Previous newsletters on the topic resulted in a number of reader responses. You can read our first comment of the issue, published 14 June 2006 here.
It is interesting to note that the Section 14 debate is still underway. On 5 December 2007 LUASA published details of another meeting on the issue in their e-sight newsletter. Apparently “the combined intermediary bodies (LUASA, FIA, BBF and ABIB) recently met with National Treasury to officially communicate their discontent with the manner in which the LOA managed to hijack the Section 14 debate…” Two new submissions were made to Treasury at this meeting. The first was a submission from the combined intermediary body, and the second (the topic of today’s newsletter) a separate submission from LUASA.
Expressing displeasure with the LOA submission
One of the LOA’s main submissions (to the Parliament’s Portfolio Committee on Finance) was that excessive financial incentives would result in intermediaries recommending that clients switch to underwritten RAs regardless of the financial implications. A concerned intermediary submits: “Surely, as an industry we should be encouraging the policyholders to improve their position and surely that implies that the intermediary must be fairly rewarded in exactly the same way that the fund managers and platform administrators are – as an ongoing percentage of the funds under administration?”
LUASA labels the LOA hijacking of the Section 14 debate as “a shrewd (and successful) attempt to prevent a “run on the bank” as many of the old generation savings products on the life companies’ books are simply incapable of delivering meaningful financial returns, given their high internal cost structures.” The feeling is that given the structures in place in many of these products, the decision to move or not is a ‘no-brainer’.
They believe that the LOA member’s underwritten savings policies will achieve significantly better investment returns if moved to LISPs. Although no specific examples are supplied, LUASA suggests that improvements of as much as 30% in investment return could be achieved. This saving would be generated “principally as a result of lower asset management fees.”
Old products requite no cost disclosure required
Another big bugbear with the S14 process is that product providers do not have to disclose costs on their ‘old’ products. LUASA says this gives them carte blanch to levy additional costs if so desired. LUASA also submitted that: “A further problem with the ‘old’ policies arises as a result of the risk tolerance that policyholders face when nearing retirement when quantitative re-balancing is required to ensure that their risk exposure is reduced by switching funds to less risky portfolios. The ‘old’ products are simply too expensive to undergo this very necessary conversion.”
Even so-called ‘new’ savings products are no required to make full cost disclosures. “Further to the foregoing section 14 debacle, the LOA’s current practice of not revealing all the costs associated with new policies in their RIY calculations (e.g. asset management fees) is not acceptable, as it makes it very difficult for intermediaries to determine the true value proposition for their clients.”
Consumers will pay the penalty
LUASA contends that the LOA has “placed policyholders in a worse position than was intended when the original notion of being able to freely transfer non-performing savings policies was mooted.” According to LUASA the prevailing situation puts the financial intermediary in a difficult position – particularly where the FAIS Act is concerned.
They feel the intermediary who previously sold ‘old’ policies are compelled (by the Act) to inform their clients of the possibility for substantially improved returns in transferring the policy. LUASA ends with an appeal to National Treasury: “In view of the foregoing LUASA appeals to NT to review the section 14 transfers in the light of the negative impact it will have on policyholder return on investment, in addition to the financial burden intermediaries will have to face when they are compelled to provide their clients with free financial advice.”
After the meeting, National Treasury requested the joint intermediary body to work on another submission, meaning this debate is certain to continue in the New Year.
Editor’s thoughts:
We have heard from a number of advisers saying that providers are making it difficult to process S14 transfers. We would love to hear about any difficulties you or your clients are having – and any of your parting thoughts on S14 Transfers debate. Send your comments to [email protected] or simply respond online.
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