The life assurance industry, which is very adept at using legal niceties to avoid meeting its commitments to policyholders, has in effect been sent packing by Judges Dennis Davis and Andre le Grange. The life assurance industry argued that Vuyani Ngalwana, the Pension Funds Adjudicator, has no jurisdiction to rule on retirement annuity (RA) matters because the underlying investment is a life assurance policy.
This was a legal technicality and thankfully the judge has cleared up the matter. What his judgment in effect means is that not only does the adjudicator have authority, but consequently the rules of your RA fund will be used as the basis for the adjudicator's determinations.
The fact that the judge ruled against the complainant, Frederick de Beer, on the substance of the appeal by Sanlam against Ngalwana's ruling does not really matter.
This case focused on whether the Life Offices Association's Benefit Illustration Agreement (BIA), which for many years was used to "illustrate" what you may receive at the maturity of your endowment policy or RA, was a promise. It clearly was not a promise or guarantee, and this is what Judge Davis has found.
The life assurance industry can take no comfort from the ruling against Ngalwana on the BIA issue.
The important cases are still to come. These cases involve the confiscatory penalties that are applied by the life assurance industry if you stop paying or reduce your contributions to your RA fund.
Ngalwana has said in his rulings that if the costs and penalties are not spelt out in the rules of your fund, then they cannot be applied. Here, in my view, the adjudicator is on more solid ground, but it is the courts that will decide.
The industry has been caught out trying to use legal niceties to elude Ngalwana's jurisdiction over them. But that does not mean that it has learnt its lesson.
This week Ngalwana ruled against Momentum for charging interest on what are called the unrecouped expenses of a life assurance company. In other words, a life company takes all the costs it has incurred in selling you an endowment policy or an RA. Every month the life company recovers part of these expenses from your premium or contribution. In effect, it is giving you a loan which you didn't know about - and charging you interest on the loan.
Now the industry claims that this is not "interest" but an adjustment for the "time value of money". The time value of money is the effect that inflation has on money.
What the life industry is saying is because it paid out all the costs upfront for future years, it must get its rands back at the same value when it recovers the costs from you over the life of the policy or RA.
So, if inflation is 10 percent in a year, the life assurer wants one rand plus 10 percent.
Sounds like a good argument. But the only problem is that Personal Finance actually investigated this matter earlier this year. In this column on February 5, I revealed that the "interest" rates being charged by the life assurance companies actually vary by anything up to 26 percent.
So the questions to the life industry are: Why is this time value of money adjustment not more or less the same for each company? And why is it not in line with the current inflation rate of less than five percent?
Let me provide an answer: The life assurance industry is again simply misleading us by throwing around fancy phrases such as the "time value of money".
The life industry has yet to provide a proper explanation as to why the charge for the "time value of money" is not included in any of our policy documents.
The industry claims it discloses all to us. It quite clearly does not, and when it does, it is usually in a way that is meant to befuddle us.
The industry simply has to learn to be more transparent and honest.
Our policy on media freebies
This week Moneyweb reported that Absa Bank had taken a number of newspaper editors and their partners on an all-expenses luxury trip to the holiday island of Reunion. One of the responses on the Moneyweb website was an anonymous note addressed to me that read as follows:
"Hello Bruce, still waiting to hear from you and your views on this 'perverse incentive' to the editors of the major newspapers. You have been slating financial advisers and investment companies for so long, yet are silent about your bosses doing exactly the same thing.
"Maybe the Receiver of Revenue would like a list of all those editors and see if they are going to declare this perverse incentive. Pot calling the kettle black?"
My response is:
1. I was not invited to go on the trip. If I had been, I would have turned down the invitation.
2. The stated and strictly enforced policy of Personal Finance is that no member of staff may accept any paid-for trip. If gifts are received, they are auctioned and the proceeds go to a charity, normally the Red Cross Children's Hospital in Cape Town.
3. As a general rule, I do not believe freebies should be offered or accepted by anyone. In this case there was no obligation on the editors to take any particular action, before or after the trip. Freebies to financial intermediaries are unacceptable because they are conditional on sales (that is, they are used as a perverse incentive).