Issue: July/August 2005
Damned if they do and damned if they don’t, the life offices are in a quandary. The series of consumer-sided rulings by the Pension Funds Adjudicator on retirement annuities, with the probability of many more to come, places them in an invidious position.
Perhaps it’s no better than they deserve. There’s a moral indefensibility to the payout on early policy termination being less, and often much less, than the investor has put in. When the same principle applied to retirement annuities is applied to life policies, their situation worsens.
The problem is systemic, firstly because the amount of money involved is potentially huge and secondly because the brand equity of the life offices is being undermined. The former can impact on life offices’ financial adequacy, the latter on the trust that encourages national savings.
This, then, is not a matter for ad hoc settlement. The more it is protracted on a case-by-case basis, the more it will exacerbate. If the Adjudicator is overturned in High Court actions about to be heard (TT June 2005), it’s within government’s remit to amend the law. If he isn’t overturned, the complaint-and-challenge process can continue interminably. A lose-lose situation is in the offing.
To complicate the situation further, in some cases the Adjudicator has ruled that a retirement fund – not the life office that has insured or administered the fund – must make restitution. It means existing fund members, who are saving until policy maturity, will have to pay. They’d have cause to scream. Alternatively, were a life office to pay when it hadn’t been ordered to, its shareholders would have cause to scream.
And where restitution has been ordered jointly and severally against a fund and life office, Solomon’s wisdom would be needed to decide on a fair apportionment between them. Impossible for an outsider to quantify, from the various sizes and lengths of various life offices’ books, is how many years of their profits could possibly be obliterated were they to pay with compound interest on costs they cannot recoup. In a worst-case scenario, guesstimates equivalent to five percent of market capitalisation (cumulatively, billions of rand) have been mentioned.
Yet it isn’t only for self-interest, or for the interests of continuing policyholders and existing shareholders, that life offices virtually have no alternative than to challenge the Adjudicator in court. They need to defend the legality of their contracts. They need to show that requisite disclosures were made, without misselling and misrepresentation. They need to show that they aren’t rip-off artists. What if they can’t?
Unfortunately for life offices, the issue is not whether policies taken to maturity have delivered value for money. It’s whether there were deficiencies in the sale of policies, made paid-up before maturity, to be recompensed as the Adjudicator has ordered. In that case, it’s a matter of how big is the bullet to be bitten.
There’s litte the life offices can do to change policies sold over many years past. Irrespective of the litigation outcomes, their longstanding business models will have to be overhauled. A start has been made with addressing the payment to intermediaries of upfront commissions, and some assurers have initiated measures to soften the blow to investors when premiums are reduced or discontinued.
Ultimately, the solution will have to be found in treating consumers with fairness (so they understand what they’re buying) and giving them value (so they get decent returns). There can be no clever tricks and no short cuts. Were these characteristics prevalent, there wouldn’t be the current imbroglio.
At present, with court cases pending, there’s a stand-off. It offers the life offices a breather to evaluate their stance, which cannot be seen as consumer-hostile, and for government to contemplate the end-game, which necessarily must be consumer-protective.
At a basic level, taking as an example the recent determination against the South African Retirement Annuity Fund and Old Mutual, a crunch is in the offing. It’s between the rulings of the Adjudicator under the Pension Funds Act and the obligations of the life offices under the Long-Term Insurance Act.
Assuming the Adjudicator is correct in his interpretations of compliance with the Pension Funds Act, which is his concern, they can jeopardise the actuarial soundness of funds in compliance with the Long-Term Insurance Act, which is the life offices’ concern. Because both Acts bind the industry to safeguard consumers, they cannot be at loggerheads.
All litigation is capable of settlement. There’s clearly a need for it here, involving life offices and government in an across-the-board negotiation over existing contracts, with the imminent redraft of the Pension Funds Act additionally to focus the mind.
A NOTE FROM THE PUBLISHER
In our June edition, we requested views of readers and advertisers on whether the publication frequency of TT should be changed from monthly to bi-monthly (once every two months, or six editions per year). Having explained why the change was being considered, we consulted extensively.
The overwhelming consensus is that a frequency of bi-monthly is preferred, at least during these early stages of acclimatisation to the innovative nature of TT.
With hindsight, I’m not embarrassed to admit, its launch as a monthly was perhaps overambitious for a market in its infancy.
Proudly, this is already our fifth edition and by the day we’re learning more of our customer needs and wishes. To the best of our ability, we’ll seek to satisfy them for a long time to come.
Now knowing that it’s widely welcomed, the change in publication frequency takes effect from this edition. I should like to thank the many readers and advertisers, who kindly offered their inputs, for helping us arrive at this decision.