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Inclusion of smoothed bonus policies in default investment portfolio – Conduct standard tabled

“A new conduct standard on the conditions in terms of which smoothed bonus policies may form part of default investment portfolios was released on Tuesday evening and is scheduled to come into force nine months from publication,” Pam Saxby for Legalbrief Policy Watch recently reported. According to the supporting documentation the conduct standard will be submitted to Parliament for a period of at least 30 days while Parliament is in session. If no concerns arise from the Parliamentary process, the final Conduct Standard will be made.

The objective of the Conduct Standard is to prescribe the conditions for a a smoothed bonus policy to comply with the definition of “default investment portfolio” as defined in the Regulations made in terms of section 36 of the Pension Funds Act, 1956. In addition, the Conduct Standard proposes to set general high-level “Treat Customers Fairly” (TCF) principles aimed at improving customer outcomes in the context of smoothed bonus policies.

The draft Conduct Standard defines “smoothed bonus policy” or “policy” as a life insurance policy with discretionary participation features, underwritten by an insurer as defined in the Long-term Insurance Act, 1998 (Act No. 52 of 1998), in terms of which any bonuses declared over a period, whether such bonuses are vested or non-vested, may be different to the return earned over the same period so as to smooth the portfolio return.

To be eligible for inclusion as a default investment portfolio, a smoothed bonus policy must comply with the following criteria:

(a) A formulaic approach must be established to calculate and determine bonus declarations, both vested and non-vested;
(b) a formula for bonus declarations may allow for a deviation of not more than 2% per annum from the calculated target bonus to include allowance for expectations with respect to future market movements;
(c) the formulaic approach must –
  (i) include triggers or factors that may result in the possible removal of non-vested bonuses and the method of removal;
  (ii) provide for factors or triggers that dictate the provision of shareholder capital to maintain the financial soundness of the policy;
  (iii) clarify the extent to which shareholder capital is viewed as a loan which will be repaid to shareholders with future investment returns versus a cash injection that will not be repaid from future investment returns;
  (iv) specify the minimum and maximum levels of the stabilisation reserve and the remedial actions which will be taken should these limits be breached;
  (v) limit the smoothing period by spreading any excess bonus stabilisation reserve over a period not exceeding 24 months;
  (vi) have a long-term funding level target not exceeding 105%; and
  (vii) be disclosed to all stakeholders;

Conditions with regards to asset allocation and changes in investment strategy underlying smoothed bonus product are also described. Furthermore, the additional requirements relating to the fair treatment of members are also explained.

Click here to download Annexure A – Conduct Standard Conditions for Smoothed Bonus Policies

Click here to download Annexure B – Statement supporting Draft Conduct Standard Conditions for Smoothed Bonus Policies

Click here to download Annexure C – Consultation Report – Conditions for Smoothed Bonus Policies.

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