Adjustments for adverse market conditions last year led to a highly unsatisfactory outcome for a client whose funds were invested in a smoothed bonus portfolio.
The complainant’s Section 14 application form was sent to Old Mutual on 3 March 2020. The transfer value at the time was R 2 006 097.41. The form stated that there would be no transfer fees. Old Mutual calculated the value on 20 March at R 1 818 620.64 and a final settlement payment on 6 April as R 1 694 067.54 after applying a Market Value Adjuster (MVA).
A complaint was laid with the Pension Fund Adjudicator, who ruled in favour of Old Mutual.
Application for reconsideration of the decision was made to the Financial Sector Tribunal. The relief sought was for a transfer to PPS of the difference between R2 006 097.41 and R1 694 067.54, or for a reversal of the transaction, reinstating the policy with the amount calculated as at 3 March.
What did the Tribunal say?
Transfers of pension benefits is regulated by sec 14 of the Pension Funds Act which deals, inter alia, with the transfer of business from a registered Fund. Sub-section (7(a) requires, under ss8, that
(iii) the assets and liabilities are transferred within 180 days of the effective date of transfer; and
(iv) any assets transferred must be increased or decreased with fund return from the effective date until the date of final settlement.
The reason for the drop in value since 3 March was the application of the MVA Adjuster in determining the value. Old Mutual explained its working as follows:
A Market Value Adjuster (MVA) refers to the method used in times of a serious financial crisis (for instance a very bad recession). Old Mutual may reduce the payable values on part-withdrawals, surrenders and zero interest loans as a protective measure of future bonus levels for customers who leave their money invested until the end of the term of their plans. The MVA is temporary and once the economy stabilises, the MVA will be removed and the applicable values will not be reduced.
The [other] values [published] reflected are values as at the first of the following month and not the values of the current date and these values may be adjusted to reflect market conditions. The MVA does just that. This portfolio is priced on a monthly basis and the MVA is necessary to ensure that the policy values take into account the drop in the market since the beginning of the month. It serves as an adjustment factor to take into account the dramatic and unforeseen downward market movements between pricing exercises.
The Tribunal notes: “Stated bluntly, the adjustment was made to determine the true value on the date of final settlement as required by sec 14(8). The Fund complied with its statutory duties. The values on 3 March and 20 March are of no consequence.”
The basis of the application for reconsideration is that the complainant did not know of the MVA Adjuster and that, therefore, it could not apply to her application. There is no reference to the adjuster in the policy but since it is a method of determining value one would not have expected it to have been there.
“The complainant and her broker knew or should have known of the adjuster. Her yearly statements referred to it. The sec 14 application informed them that the surrender value might be reduced by a market level adjuster if investment market conditions warrant it.”
Complaint not upheld
In dismissing the complaint, the Tribunal noted:
“The PFA, in a detailed judgment, considered all the facts and submissions and concluded that the complainant was not dealt with unfairly. Old Mutual, more than once, answered all the accusations. The present application does not refer to any instance where the PFA had ignored any fact or misdirected herself. To rehash everything said in 300 pages will serve no purpose.”
“Finally, fairness has two sides. It is not only the interests of the complainant that count. She could not, in fairness, profit to the detriment of the other members of the Fund by receiving a disproportionate share of the values as on 6 April. The complainant accepted the risk of her fund hopping decision explicitly and must live with the unfortunate consequences.”