Author: Lisa Griffith, an Associate Director at BDO Wealth Advisers.
Paying penalties when you choose to transfer your retirement annuities has been a thorny issue for investors in RA’s for some time.
The lure of a unit trust based retirement annuity, or concerns about mediocre performance, may prompt investors into switching to a new generation product. However, this process will not always result in the investor being in an improved position and so it may ultimately not be prudent to transfer after all.
When switching, the issue of those pesky un-recouped charges – called ‘causal event charges’ – arises. Causal events charges, also referred to as penalties, are charges that the RA provider is permitted to levy every time an event takes place. The initial retirement annuity provider is entitled to deduct these charges prior to transfer. Logically, one would expect these charges to decrease over time. However, we have noticed that in a number of cases, after initially declining annually, these penalties steadily increased – quite substantially.
One disgruntled investor decided to challenge the status quo and determine the substance of his penalties. The response from the company was astonishing. It referred to the imposition of an “Actuarial Reduction Factor’ – which didn’t particularly relate to the policy, but, according to them, needed to be viewed holistically within the business practices of the insurer.
The principal of this view is that:
- The ‘pool’ of investments must be financially viable.
- When one investor exits the ‘pool’, the costs to the remaining policyholders will increase.
- Hence the “Actuarial Reduction Factor” levied on those who withdraw from the fund, in order to not place the burden of the extra costs (due to the shrinking pool) on the remaining investors.
- The company further stated that the ‘reduction in fund value is not a penalty but rather the recoupment of future income derived from its existing business.’
Not receiving the answers he was seeking, the investor then lodged a complaint with the Pensions Fund Adjudicator.
The Adjudicator ruled in favour of the Insurer, on the basis that causal event charges must be computed using generally accepted actuarial principles and that the penalty was less than 30% of the fund (legislative). An independent actuary confirmed that the un-recouped costs had reduced to zero, but that the Actuarial Reduction Factor had increased in monetary terms.
This was an upsetting turn of events for the complainant and indeed, all consumers. The Tribunal did however express their misgivings on the company’s claim that it was not in a position to determine, at any stage of the policy, what the financial impact of early cancelation would be.
This was seen as being inconsistent with the Treating Customers Fairly (TCF) approach – a regulatory proviso that is designed to ensure that specific and fair outcomes are delivered to financial services consumers – and the Tribunal has referred this matter to the Financial Services Board. We hope for a better outcome from them.
It is an investor’s right to switch their retirement funds from one service provider to another. However, it is the right of providers to charge penalties and therefore it may not always be a good decision. It is wise to consult a financial adviser to assess your options beforehand.
Should you be considering switching a retirement annuity, contact a financial adviser for assistance with this complex process. Their objective advice will contribute to the best possible outcome for your portfolio.
(Determination in terms of Section 30M of the Pensions Fund Act, 24 of 1956 (“the Act”): RH Thomson (“complainant”) v Momentum Retirement Annuity Fund (“first respondent”) and MMI Group Ltd (“second respondent”)
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