There seems to be a fundamental misunderstanding in the financial services industry about about it means to put you, the consumer, first.
Products and services are continually modelled on shareholder profits and/or rewards for financial advisers. Of late a number of life companies have launched new products that they claim are simpler and cheaper than their traditional products.
But when I look closely at these investment products, I do not see any fundamental change. Yes, they may be simpler and cheaper than their forebears, but they are still not simple and cheap.
One company that came to see me said it is looking for solutions that will enable it to provide simpler and cheaper products, but said this is not always easy.
My response was that the solution already exists. It is a product called a unit trust fund.
It is significant that the office of the Pension Funds Adjudicator also sees unit trust funds as the answer.
Naleen Jeram, the deputy adjudicator, raised the issue at the recent conferences of two organisations - the Financial Planning Institute (which held its conference last week) and the Association of Collection Investments (ACI), of which unit trust companies are members.
It is interesting that at this week's ACI conference, the unit trust fund industry indicated it is fast developing generic products that will allow it to fill more of the space in the retirement savings market. The increased competition will no doubt force the life assurance industry to develop even simpler and cheaper products.
But back to Jeram.
Two types of RA funds
Jeram says that there are essentially two types of retirement annuity (RA) funds:
- The most common and traditional type of RA fund is the life assurance (underwritten) model, where you, via a financial intermediary, apply to join an RA fund. The fund then applies to the underwriting insurance com-pany. If the insurance company is satisfied with the application, it issues a policy to the RA fund, which, together with the rules of the fund, regulates the terms and conditions of the benefits payable.
- A pure unit trust RA fund, where you, with or without a financial adviser, apply directly to the RA fund to join the fund. If your application is accepted, you select the various investment portfolios provided by the unit trust company. An insurance company does not issue the fund with an insurance policy. You, as a member of the fund, effectively invest in various products of your choice.
(My comment: There is effectively also another model, which has a similar structure to the pure unit trust RA, but where the costs tend to be more aligned with those of the life assurance industry.)
These RAs are offered by linked investment service providers (Lisps) and give you a wider choice of underlying investments.
You are not restricted to the funds/portfolios of a single company. In most cases, you are forced to use a financial adviser, who is paid a higher commission/fee than those paid by a unit trust company.
Jeram says that to date, all, except one, of the RA determinations made by the adjudicator relate to the life assurance RA funds.
He says the most controversial and common issue arising from the adjudicator's RA rulings relates to where a member joins a life assurance RA fund and starts to make contributions at a specified rate.
But, for a variety of reasons - often related to financial constraints (for example, loss of income) - the member either stops contributing or reduces his or her contributions to the fund; or a member decides to retire at a date earlier than that initially selected in the RA policy.
Jeram says it "is not clear to us why members select an age beyond 55", because every year of membership beyond this age will mean greater costs for the member.
Early termination penalties
If you prematurely stop contributing before you reach your chosen retirement age, the insurer will impose a premium termination fee or a policy alteration fee.
(My comment: These penalties do not apply to the pure unit trust products, but may apply to some, but not all, Lisp RA products.)
Jeram says: "From many of the rulings, it has clearly emerged that this type of fee or penalty is never communicated to the member at the inception of membership of the fund or at any time thereafter. Furthermore, neither the rules of the fund nor the policy documents make provision for such a fee.
"Life companies and, strangely, the trustees who are supposed to look after the interest of members argue that this so-called early termination charge relates to the cost that the insurer has already incurred and paid upfront which it was to recoup over the term of the underlying policy. If the member stops contributions before the policy has run its course, these costs must be recouped. In our view, this makes sense. But that, on its own, is not enough."
Jeram says provision must be made for the penalties in the rules of the RA fund and/or the policy documents.
"In all of these instances, we have taken the firm view that if the fee is not authorised in the rules or the policy documents, then the insurer or the fund may not charge it," Jeram says.
"Put differently, we are not saying that insurance companies cannot recoup their expenses. Rather, we are saying that they must have the clear authority, either in terms of the rules or the policy provisions, to effect such a deduction."
Much of this debate surrounds the payment of upfront commissions to financial advisers.
The financial services industry points out that financial advisers encourage relatively few people to be regular savers in unit trust funds, because the commissions advisers receive are paid only on an as-and-when basis.
My argument, however, is that commissions on unit trusts (at least three percent of each premium and possibly an annual fee based on the value of the assets) are being paid, and therefore the Financial Advisory and Intermediary Services Act requires that you receive appropriate advice.
So, the question must be asked whether advising you to invest in a high-cost, inflexible life assurance product constitutes appropriate advice? Think about it.
IRF convention is a must for your trustees
The retirement industry is in a state of turmoil. The government is overhauling the Pension Funds Act; Alexander Forbes and other retirement fund administrators have been caught "not lawfully" picking the pockets of retirement fund members; the Pension Funds Adjudicator is increasingly challenging trustees to do their jobs properly; there are problems with the distribution of pension fund surpluses; the need to contain costs is becoming increasingly important; the umbrella fund option is riddled with problems; investment strategies and associated issues are getting increasingly complex; and the taxation of retirement funds is under revision.
These are some of the daunting challenges facing trustees. If trustees are to avoid the pitfalls, they must be properly informed. The good news is there is a way to be informed.
The Institute of Retirement Funds (IRF) will hold its annual convention at the International Convention Centre in Durban from August 20 to 23.
All the important issues, from fund governance to trustee responsibilities, will be dealt with at the convention. Retirement fund experts, policymakers from the government and the regulators, and industry observers will be giving their views and advice on all the main issues.
Trustees will also have an opportunity to interact and swap notes on problems and solutions. In my view, it is essential that every board of trustees should send a representative to the convention.
For further information, contact the IRF at telephone (011) 369 0160, fax (011) 326 3883, or email [email protected] The IRF's website is www.irf.org.za