Is 180 days reasonable for a fund transfer?
How long should it take to move funds from one retirement annuity structure to another? With modern day computing power we should be able to complete such transactions with the click of a mouse button. But it’s not to be. Financial services intermediaries often complain of lengthy delays when processing Section 14 (S14) transfers, with transactions frequently taking the 180 day maximum to complete. Who is to blame?
FAnews tackled the issue on two fronts. In today’s newsletter we look at broker views, while in the April 2010 FAnews Magazine we look at the problem from a life company perspective. If you’re not already subscribed to the FAnews Magazine, then click here.
Financial advisers, life insurers, the Financial Services Board (FSB) and pension funds all have a part to play in the retirement annuity transfer process. But before we continue the discussion we need to know what a S14 transfer is. Old Mutual provides the following definition: “A S14 transfer is the move of assets funding a member’s benefits from an approved fund to another approved fund or to any other person.” The transfer is referred to as a S14 transfer because that’s the section in the Pension Funds Act of 1956 that govern transfers between any approved retirement funds, including domestic retirement annuity funds. There have been subsequent amendments to the Act – with processes for amalgamation and transfer clearly set out in the FSB’s PF 120 circular.
Are S14 transfers proceeding without hitch?
After receiving numerous complaints about S14 transfers we approached Ian Middleton, managing director of Masthead, to share some of Masthead’s member broker experiences. The first question we asked was whether the S14 transfers are taking place as envisaged in the regulations?
One financial advisor said part of the problem was that such transfers were often initiated for reasons not contemplated in the initial legislation. An example could be an intermediary requesting a transfer to ‘earn’ trails where there were none previously. “The media in 2008 received input that some financial advisers were taking cash upfront of 1%, and annual trails of 1%,” he said. This proves that no matter how much control is envisaged, there is no control over greed. There are some situations where S14 transfers are appropriate. These include:
· The transfer of funds from life company retirement annuities to linked retirement annuities, specifically to address the lack of transparency in life company fees and the limits to management of invested funds;
· The consolidation of small living annuities into a single living annuity to minimise fees through economies of scale and to facilitate the management of underlying unit trust fund investments; and
· The transfer of funds from patently expensive administrative platforms to better and more economic ones.
“I always believed that S14 transfers were made available to the client to make their portfolios more manageable,” added another broker. He mentioned that consolidating a client’s portfolio reduces costs and the resulting larger fund value can be more effectively managed in a single wrapper. Another allegation is that transferring companies are trying their utmost to retain funds under management, setting up retention departments, which further delays the process.
Time is the real killer here!
Time is the major problem where S14 transfers are concerned. Selwyn Feldman, Executive Consultant of OMAC Actuaries and Consultants, comments: “Unfortunately, the process to obtain approval from the FSB for the transfer of funds from one fund to another is torturous, and involves many different role-players. Once the client has instructed the Trustees of their existing Retirement Annuity Fund to apply for a transfer to another fund, these Trustees, together with the Actuary of that fund, need to complete the necessary application forms. These forms are then sent to the Trustees of the receiving Retirement Annuity Fund for them, together with their Actuary, to complete their requisite forms, and forward all the documentation to the FSB for approval. The FSB may then query the terms of the proposed transfer, and will need to be satisfied before giving their approval. The potential for delay is also exacerbated by any of these role-players failing to provide complete details, requiring rectification and resubmission of the documents”
The problem is compounded because parties to the transaction blame each other for delays. “The transferring funds blame the FSB – and the FSB says it is waiting for documents from either transferring or receiving fund,” said another broker. “What I have experienced is that the transferring fund takes its time to prepare and send their documents.” The maximum time allowed to complete a transfer is 180 days, and Old Mutual advises the moment a S14 transfer is requested that the transfer ‘may take six months’! The S14 transfer becomes a time consuming and costly exercise as the broker has to make repeated calls to follow up on every stage of the process. Another broker alleges that the transferring life company is responsible for process delays, adding that certain companies try to treat the transfer as a withdrawal. It takes too long for the process to complete and the penalties levied by life companies are punitive. The lengthy process causes clients to lose confidence in their brokers.
A handful of Masthead brokers provided typical examples of S14 transfer delays. A signed S14 transfer from Old Mutual, sent on 29 September 2009, hadn’t been finalized by 1 February 2010. The same broker had two Employee Benefits cases that took 18 months to complete. An S14 transfer from Old Mutual, sent in on 17 November 2009, was stuck in process due to a ‘Form H’ not being signed by a principal officer. A similar transfer from Sanlam was sent in on 8 December 2009 and completed on 15 February 2010. “How is it possible that there is such a big time difference in handling a similar case by two large life companies?” A transfer from Momentum to Mutual Galaxy took 20 months to complete. “Everything that could go wrong did,” says the broker, adding that he would steer clear of S14 transfers unless absolutely necessary. Brokers are powerless in such situations, because the law allows 180 days for the transaction to complete.
These transfers should be working smoothly by now!
We asked brokers whether they had any additional comments on S14 transfers, what works, what doesn’t work and their suggestions to improve the process. Some brokers felt the confusion around S14 transfers should have been thoroughly dealt with, and that delays between transferring and receiving funds should already be ironed out. The FSB has also streamlined processes for handling such transfers. Brokers would like proof of service level agreements between life companies and the FSB, including an audit trail of document delivery / receipt.
A broker from KwaZulu-Natal notes: “The fact that brokers do not receive commission on a S14 transfer has prevented unnecessary churning.” But now that the majority of funds are on so-called ‘New Generation’ platforms, there aren’t too many motivations to request future S14 transfers. “In most cases I have looked at, it would take the client seven years to catch up to his current value (before Transfer Charges are deducted), and that is assuming no further growth in the transferring fund over those seven years,” he said. “A S14 transfer should be an exception rather than a norm, whereby without a shadow of a doubt, it should be proven that the client would be GROSSLY disadvantaged if he stayed where he was, and if it is the case this should be taken up by the FSB with the insurer involved.”
There were also some warnings. Brokers need to be aware that transferring companies can levy an additional fee before completing the transfer. The assumption that the client was already “penalised” (reduced fund value) when the policy was made paid up is incorrect.
Editor’s thoughts: The FSB is on record delays in the approval of S14 transfers are often due to incomplete forms, amended forms, or problems the registration of special rules at participating employer umbrella funds. In such cases the FSB will ‘hold’ the process for 6 months for a response, after which the application is scrapped and the process has to be restarted. Would you agree S14 transfers should be completed as an exception rather than the rule? Add your comment below, or send it to [email protected]
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