When I started researching the background for this article, the words of Bruce Springsteen’s “The ghost of Tom Joad” came to mind:
| Well, the highway is alive tonight But nobody’s kiddin’ nobody about where it goes I’m sittin’ down here in the campfire light Searchin’ for the ghost of Tom Joad |
The term “causal event penalties” is viewed by many as a synonym for “treating customers unfairly” and has been thus since it was uncovered way back when, in the days when Barend du Plessis was the Minister of Finance (1984 – 1992).
One night, at a function, a friend complained to him about the fact that a retirement annuity which was made paid-up after two years had virtually no value. “Onrusbarend”, as he was known in those days, made some enquiries, and within days, commission on RAs were banned with immediate effect. Ja, Sarel, they had those powers back then too. Of course, the convenient scapegoats in the tale were the unscrupulous commission-hungry financial advisers.
Following industry consultation, he relented and agreed that future RAs could attract as-and-when commission. The industry responded by introducing innovative plans to discount future premiums which allowed intermediaries to still get their commission upfront.
Fast forward to 12 December 2005 when the Life Offices Association and the then Minister of Finance, Trevor Manuel, signed the so-called “Statement of Intent” which set out measures to be implemented in respect of savings products offered by the long-term insurance industry. This was in response to “…problems highlighted by the Pension Fund Adjudicator (PFA) with respect to the lack of transparency of costs and charge structures, with the result that the expectations of consumers in respect of the net returns from retirement annuity fund member policies and other savings policies have not been met, particularly in the context of early premium cessation.” The industry agreed to set certain maximum levels of penalties for future contract changes and refunded affected policyholders for “losses” suffered over the preceding three or four years. The rest just had to live with the consequences of their “indiscretion” in unilaterally changing their contracts, despite possible valid reasons.
| But the highway is alive tonight Where it’s headed everybody knows I’m sittin’ down here in the campfire light Waitin’ on the ghost of Tom Joad |
The media, and particularly Bruce Cameron in Personal Finance, regularly picked up anomalies, some amounting to millions. The transgressors merely rectified the cases exposed but failed to address the underlying issues which probably affected thousands of others negatively, too.
Press the old Fast Forward button again to proposed amendments of the Regulations under the Long- and Short-term Insurance Act, published in July 2017.
At that stage, the maximum causal event charge was 30% of the actuarial valuation of the fund at the time of the event.
The proposals envisage a maximum of 20% “…on or after 1 January 2018 but before 1 January 2019, with this percentage being reduced on an annual basis to an eventual maximum of 5% from 1 January 2029 onwards for fund member policies.”
In an article titled Causal event charges and TCF published in 2017 we discussed a complaint to the Pension Fund Adjudicator in which she found that the causal event charge was lawful and within the limits permitted, and that she had no reason to interfere with the imposition of such charges.
Ms Lukhaimane added that, although lawful, the actions of the respondents could hardly be described as “…being anywhere near the letter and spirit of the TCF principles.”
“The respondents should actually refrain from quoting TCF principles when levying causal event charges as the charges are obscure and cannot be translated into value for members of retirement annuity funds.”
“That a settlement was reached in terms of the Statement of Intent does not in any way address the unfairness and absence of value that often accompanies the levying of causal event charges.”
“This Tribunal (the PFA) has on countless occasions called for the implementation of the Retail Distribution Review. Although this will still not remove the obscure charges, it is at least a long overdue development that will ensure that entities like the respondents deliver a semblance of what their products promise.”
Causal event charges are essentially the recovery of unrecouped expenses by the insurer. Modern day Unit Trust RAs ensure much fairer outcomes for policyholders, but old-style RAs remain in place for two main reasons – higher provider fees and more commission for intermediaries.
So, 30 years after “Onrusbarend” smelt a rat, nothing much has changed. Well, if you have a business where your future losses are paid by “delinquent” customers, you would not be in a hurry to change things, would you?
| Well, the highway is alive tonight But nobody’s kiddin’ nobody about where it goes I’m sittin’ down here in the campfire light With the ghost of old Tom Joad. |
