Old Mutual Welcomes Clarity in Retirement Annuity Case
Old Mutual welcomes the clarity arising from the judgement in the Cape High Court yesterday, in the appeal by Old Mutual against a ruling of the Pension Funds Adjudicator.
Customer Solutions MD Peter de Beyer comments: "The life insurance industry is working hard with Government and other stakeholders to rapidly develop a world class retirement savings environment for all the people of South Africa. This includes improving both occupational and personal retirement savings offerings, as well as developing solutions which broaden access to previously under-served market segments. The removal of the uncertainty created by these rulings will enable this important task to be tackled more quickly and with even greater energy and focus."
Background
The case concerns a retirement annuity fund member who had stopped her contributions before her retirement date. The Adjudicator had ruled that Old Mutual had no authority to reduce the value of her policy in order to recover unrecouped expenses.
Old Mutual follows a fundamental principle whereby the expenses associated with each policy are borne by the holder of that policy. These expenses are not subsidised by other policyholders. It is for this reason that paid-up values have to be carefully and properly calculated.
This principle ensures fairness between policyholders, and is fully supported by the legal framework within which such contracts are regulated.
As a result, Old Mutual appealed against the ruling of the Adjudicator: to ensure that this principle, aimed at providing equity between ongoing and exiting members, was upheld as reasonable and lawful.
Finding of the court
After a thorough review of the entire case, the court found in favour of Old Mutual's appeal, and ruled that the Pension Fund Adjudicator's ruling must be set aside.
The judge described the PFA's conclusion that Old Mutual was not authorised to reduce the value of Mrs H's RA when she made it paid-up as "clearly wrong".
He commented : "On the contrary, the applicant (Old Mutual) was contractually obliged to calculate a paid-up reduced benefit upon cessation of her premiums by second applicant (Mrs H).
On the question of fairness, the judge stated : ".there is in my view no basis for a finding that this reduction in value was arrived at in a manner that is unfair, unreasonable or capricious"
Value for money
It is worth noting that Mrs H has so far received a return on her total contributions, after all costs and including some life and disability cover, significantly ahead of inflation.
Legal clarity
Old Mutual supports the office of the Pension Funds Adjudicator, and generally regards the rulings of this office as fair and reasonable, even in cases where the rulings have gone against Old Mutual.
However, in the past year the Adjudicator has made a number of rulings with regard to retirement annuities that we believe to be flawed. In particular, the view that clients who terminate their contracts early should not have to refund their fair share of the costs incurred, is, we believe, wrong, since it results in inequitable treatment of clients.
Old Mutual believes that through this judgement we now have clarity about this issue, and that retirement annuity members can now be treated equally.
Dealing with traditional products
Traditional RA products - of which this policy is an example - provide sound value for those members who maintain their contributions until maturity. In limited cases, where members of these traditional products stopped their contributions early, significant reductions in value were experienced. In some cases these reductions were unduly harsh on the client. The December 2005 Statement of Intent, signed by major industry players, including Old Mutual, addressed this challenge, by prescribing maximum reductions on fund value in cases where clients stopped contributing before the end of the contractual period. It is important to note that the reductions applied to Mrs H's policy were far less than the maximum reductions prescribed by the Statement of Intent.
Looking ahead
Old Mutual realizes that changes in the economic environment have required greater flexibility in retirement products. For this reason we have introduced new generation products which seek to provide this greater flexibility, allowing members the option of reducing or stopping their contributions with little or no reduction in fund value.
