The Professional Provident Society (PPS) announced in a media release last week that, from 1 October, the PPS RA (underwritten by Sanlam) will be closed for new business, as well as for new ad-hoc premium increases or ad-hoc single premiums on existing business. In future, only the lower-cost, versatile PPS Investments RA, i.e. the unit-trust based option, will be available for new business and increases at PPS.
The decision was made, based on its view that “…legislative changes and the launch of more cost-effective, transparent and flexible products now offer investors an enhanced value proposition.”
Advocate Thinus Ferreira, Principal Officer of the PPS RA, explains that one of the biggest drawbacks of underwritten RAs is that they have complicated fee structures which include some fees charged on an upfront basis.
In contrast, Ferreira says, new generation, unit trust-based products charge far lower fees and do so as-and-when investments contributions are made – not upfront. “Over time (and especially when taking the impact of compound returns into account), this has the potential to make a significant difference to the total level of savings ultimately accumulated.”
In addition, insurers selling underwritten RAs, impose termination charges on clients who wish to transfer their RA to another RA before the stipulated investment term is over. New generation RAs eliminate upfront fees and remove the termination charge associated with switching product providers.
Sanlam felt aggrieved by the fact that they were informed of the decision on the same day that it was announced in the media. In their response to the PPS announcement they said:
From a professional courtesy point of view, we are disappointed that Sanlam was not informed of the decision early on. As a result of the late notification, PPS accredited intermediaries will have very little time to get their advice processes to their clients in order.
We believe the decision by the Board of Trustees of the PPS RA Fund presents a one-sided view with regards to underwritten RAs in general. As noted in their PPS RA Fund marketing material, PPS views ‘traditional policy based membership’ (i.e. underwritten RAs) as expensive, less transparent and inflexible. ‘Modern unit-trust based membership’ is viewed as cheap, more transparent, and flexible; and tailored to the individual.
An article by Bruce Cameron, in Personal Finance, discusses both sides of the issue.
The PPS RA Fund has for the past 12 years offered two RA investment options:
* The life assurance investment option underwritten and extensively sold by Sanlam, in which about 118 000 PPS RA Fund members have about R24 billion invested. This option will stay open for current members until all existing investments mature. Members who make monthly contributions will be able to continue to do so.
* A unit trust option, called PPS Investments RA, offered in conjunction with Coronation Fund Managers. The PPS Investments RA is a lower-cost, versatile product that allows members to increase, decrease or stop paying their contributions without incurring a penalty.
Hennie de Villiers, chief executive of Sanlam individual life and segment solutions, says: “We believe the decision by the board of trustees of the PPS RA Fund presents a one-sided view with regards to underwritten RAs in general.
“We believe that there is room for both underwritten and unit trust RAs.”
This particularly with new-generation underwritten RAs, such as its Stratus version, which, he says, are largely the same as unit trust RAs.
“New-generation underwritten (life assurance) RAs are competitively priced, transparent and flexible, and also tailored to the needs of the individual,” De Villiers says.
In fact, the costs, he says, are so competitive that over the longer term of 15 years plus, the costs of a life assurance RA will have less impact on your end benefit than the costs of a unit trust RA.
De Villiers, not surprisingly but unacceptably, attempts to downplay the real Achilles heel of the life assurance RAs, namely the confiscatory penalties that can be applied if you reduce or stop paying your contributions, or if you transfer your savings to another product provider before the maturity date.
He dismisses the confiscatory penalties as only a “philosophical difference” between life assurance and unit trust RAs. This is absurd, considering the billions (not millions) of rands that life assurance companies have taken off savers over the years consequent of the confiscatory penalties. There are no such penalties on unit trust RAs.
Then he cynically adds that life assurers offer a product without the penalties, but – and this is a big but – this “will, however, necessitate an increase in the total charge levied against all policyholders”.
The problem with the penalties is that they are applied even when someone cannot afford to maintain the contributions because of loss of income, such as business bankruptcy, retrenchment or ill-health.
One point on which he has a sound argument is that you can get guarantees on your RA savings only by using a life assurance RA – there are no guarantees available for unit trust RAs.
Cameron makes the point that the …claims and counter-claims being made about the products shows how difficult it is for consumers, and even their advisers, to assess which products are the most appropriate for their hard-earned savings.
The industry simply has to be forced to be a lot more transparent so that consumers are not left muddled by such clashes, making it difficult to decide what is in their best interest.
And herein lies the problem for advisors, who are first to get it in the neck if complaints are laid against them. To avoid claims that they recommended one or the other product, purely for purposes of more commission, they will have to divulge all of the above to clients, and more.
The Treat the Customer Fairly drive will have a decided impact: the sixth fairness outcome requires that customers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or lay a complaint.
Who will remember, five years from now, how complicated this issue is today? Arguments like “You should have known better” or “The main reason for the product recommended was upfront commission” are bound to crop up, and how do we defend ourselves against that?