||14 August 2005 12:00
Jonathan H Pienaar
|Show: ||Carte Blanche|
Henrietta Geldenhuys (journalist): 'You expect to get robbed on the street, or you expect to get a burglary in your house, but from a big financial institution?! To get robbed like that... I don't think it's fair.'
Henrietta Geldenhuys invested R14 400 in a Liberty Life Retirement Annuity. After early surrender costs of R11,907 were deducted she was left with R5 945.
Jaco Schwartz (business owner): 'There's always some kind of excuse not to pay out and not to deliver what they actually promised.'
Jaco Schwartz invested R56 890 in a Sanlam Retirement Annuity. When he ceased payment, costs of R43 000 were deducted, leaving R15 057.
Thabiso Seipobi (Pension Portfolio Administrator): 'Why are they charging me for my money that I am investing with them?'
Thabiso Seipobi paid a lump sum of R6 295 into a Momentum Retirement Annuity. After costs of R6 090 were deducted, he was left with a nil balance.
Imthiaz Sirkhot (legal professional): 'They are charging me a management fee to manage my money and that's exactly why I'm paying them... to manage my money responsibly.'
Imthiaz Sirkhot invested R85 000 in a Sanlam PPS Retirement Annuity. Poor performance reduced the fund to R62 596, and early surrender penalties of R23 873 left him with R38 000.
Devi Sankaree Govender (Carte Blanche presenter): 'For many people who don't work for a big company with a pension fund, the only option is to invest in a Retirement Annuity - an RA. The idea is that every month you put away a little money, which goes into a fund which one day will see you through your retirement. Well at least, that's how it gets sold.'
Henrietta Geldenhuys's parents saved R10 a month for twenty years, and presented her with R10 000. So she decided to do the right thing, and she invested it all in a Retirement Annuity.
Henrietta: 'The financial adviser advised me to keep on paying in the retirement policy. So then I was freelancing at the time.'
But Henrietta soon became permanently employed, with a company pension fund. She couldn't afford to contribute to two funds, so she called the Liberty Life offices.
Henrietta: 'I told them they must stop the policy and they did it immediately, without warning me that they'll take any penalties.'
The penalties left her with just over R5 000, from her investment of R14 400.
Henrietta: 'I thought it was an honest mistake. I thought they had made a mistake with my money. So I phoned them and I said, 'Just put all my money back again, please, because this a big shock to me that there's only R5 000 left.'
Henrietta's investment is just one of the approximately 2,3 million RA's currently registered in South Africa. In the past, people who were unhappy with the performance of their funds thought they had no recourse in this multi-billion rand industry. But in fact there is one: the Pension Funds Adjudicator.
Devi: 'Retirement annuities have been at the centre of a series of rulings by the Pension Fund Adjudicator's office since March this year. This has resulted in a major shake-up to the insurance industry. The newly appointed adjudicator Vuyani Ngalwana has had an interest since 1995 in the high cost of retirement annuities. And now he's taking on the industry head-on.'
And he's become something of a consumer hero, making headlines with his controversial views.
Vuyani Ngalwana (Pension Funds Adjudicator): 'I don't want to generalise and say that people tend to lose their money when they invest with insurance companies and retirement annuities. Obviously there wouldn't be a complaint if a person is not on the losing end. So, from what we've seen, there [has] been substantial losses of money.'
Henrietta: 'On my policy document it says that if I have a problem I can contact the Pension Funds Adjudicator... actually on the Liberty policy. So I just wrote him a letter explaining that my parents had saved me this money for twenty years and now they have robbed me [of] this money and that I would like it back. So, much to my surprise, the Pension Funds Adjudicator found in my favour and I was ecstatically happy. Vuyani Ngalwana is my man!'
Vuyani: 'It seems to me that some insurance companies just make up these terms and they come up with these penalties as they go along. If it is not provided for in the rules then they look at a creative way of charging.'
Quite a few of the cases Vuyani has ruled against have been to do with the high costs charged by insurance companies in the case of 'early surrender'. Personal Finance editor and author of 'Retire Right', Bruce Cameron, says that the policy period need not necessarily be for the time to retirement.
Bruce Cameron (Author: 'Retire Right'): 'One of the schlenters that have been pulled by the life companies is that in terms of tax legislation you cannot withdraw money from a retirement annuity before the age of 55. But what the life companies have gone and done is that, if you're age twenty, they tell you must take out a contract to age 55 when it matures. That is absolute rubbish. That makes the commission period for the whole period from age 20 to age 55. They also load you with all the costs and everything else and they try and lock you in. But in fact, they could sell you a five year contract.'
Both Jaco Schwartz and Thabiso Seipobi had difficulty meeting their payments and wanted to make changes to their RA's.
Jaco Schwartz: 'I was under tremendous strain and financial stress and I contacted them - Sanlam - to see if we could reduce the monthly payment to about R500. And I spoke to one of the little ladies at the consulting office and she said to me that apparently there will be a penalty of R43 000.'
This meant that, from his total investment of R56 000, he was left with around R15 000. He had expected some costs, but to have more than three-quarters of his investment taken was a shock. All Thabiso wanted to do was take his nest-egg of R6 000 that he'd left as 'paid up' in a retirement annuity fund, and start contributing again.
Thabiso Seipobi: 'To my surprise they told me that I have nothing.'
Devi: 'How did you react?'
Thabiso: 'I felt cheated. I was shocked. I was shocked.'
Life insurance companies say that brokers' commissions are responsible for a large portion of the costs associated with early surrender on policies. Gerhard Joubert of the Life Offices Association explains.
Gerhard Joubert (Life Offices Association): 'The broker's commission in a RA, if it's an upfront commission, is more than 100 percent of the first year's premium.'
Devi: 'It's gone. And in the second year?'
Gerhard: 'It's a little bit less.'
Devi: 'And then that's when the insurance fund starts taking money out?'
Gerhard: 'Well no. They also start taking money from year one.'
Johann van Rensburg, of the Insurance Brokers Council, maintains that the insurance companies are responsible for at least two-thirds of the costs incurred over the lifetime of an RA.
Johann van Rensburg (Insurance Brokers Council): 'I think brokers are unnecessarily being blamed for the costs of products. I just think that the structure needs to be revisited so that the consumer, the broker and the life office all have a fair deal in this.'
Last year 20.5-billion rands worth of individual life investment products were surrendered before maturity. Most insurance companies list early surrender as a profit centre.
Bruce: 'In the Sanlam prospectus, when they listed, they said that they actually made a profit from early surrenders or terminations or reductions from these [confiscatory] penalties they're levying.'
Henrietta: 'They actually bargain on the fact that I'm going to cancel the policy and I'm not going to ask any questions and they're not going to tell me anything. Because that's how they make money, isn't it?'
Let's take a fictional case study, based on the real life experiences of thousands of people. Paul and Mary don't want to be a burden on their children or the state when they grow old, so they take out an RA with a reputable insurance company. Thirty years previously, Mary's parents did the same thing and are looking forward to a promised monthly pension of R2 000 per month. To their horror, they discover that all they will get is R900 - less than half. It doesn't seem to add up.
Devi: 'Actuaries are mathematicians who can turn the everyday business of life into a numbers game, which is quite essential for assurance companies in calculating their margins. One actuary turned his attention to the high cost of saving for retirement in South Africa, and made some startling discoveries.'
Last year Rob Rusconi presented a report to the Conference of the Actuarial Society of South Africa.
Rob Rusconi (Actuary): 'The objective was to essentially add up all the charges - and I'm talking about the explicit charges - the fees, and see how much of the cake was nibbled away by those charges.'
Rob's study found that pension funds costs could range from 17 to 27 percent, while the costs for life policies, such as RA's, range from 27 to as high as 43 percent.
Devi 'At maturity, if between 27 and 43 percent goes towards costs, is your money actually growing?'
Rob: 'We do expect it to grow. We do expect investment returns to be received. But charges continue to eat into it.'
Vuyani: 'My concern is the lack of transparency when it comes to the charging of the costs. If a person contributes, say R 100 000, and five years later their contribution is worth R 50 000, it doesn't make sense.'
Gerhard: 'I don't think our industry did a very good job of managing those perceptions. If we had explained to them properly that inflation has come down and therefore investment returns come down; and explained to them the issues of real returns, they may not have freaked out.'
In cases like those of our fictitious Mary's parents, the Adjudicator has ruled that insurance companies must keep the promises they made when selling the policy.
Vuyani: 'The insurance companies are saying that these are illustrative amounts, they are not guarantees. And yet, these so-called illustrative amounts are based on certain assumptions. So what I then do is look at the assumptions on which these illustrative amounts are based. If the assumptions are met, then the assumptions that are promised must be paid. It stands to reason.'
Although the Adjudicator's findings have sent tremors through the insurance industry, for some people - like Henrietta Geldenhuys - it's too early to celebrate: life insurance companies have applied to oppose some of these rulings in the High Court. But can the average person take on the might of these financial giants, without legal assistance?
Henrietta: 'I don't think it'll be wise for me to pay legal costs on this because it's a small amount. I mean, as you can see, it's only R14 000.'
Devi: 'So here's the deal: you've put money into a retirement annuity, and early on in the contract the insurance company has already deducted broker's commission and some of their costs. And so even if the fund under-performs, there seems to be no motivation on the part of the insurance company to make your money grow. And if you decide to take responsibility for your own investment, there are heavy penalties to be paid.'
One complainant was prepared - and able - to take his case all the way to the High Court. Imthiaz Sirkhot is a legal professional whose Sanlam-based fund was performing badly, so he wanted to transfer it to another Sanlam policy. He was told they would deduct over R23 000 in penalties. Imthiaz chose rather to make the fund paid up, and cease contributions.
Imthiaz: 'I then discovered a few months afterwards that they still deducted the amount of R23 892. So either way, whether I paid it and stopped contributing or whether I transferred internally, they are still going to penalise me.'
When we mentioned Imthiaz's case to Gerhard Joubert of the Life Offices Association, he was unable to tell us what these high costs could have entailed.
Gerhard: 'I don't know the particular circumstances of this case. But Life insurance companies have traditionally paid commission on an upfront basis, so that would have taken a large chunk of the initial fund value.'
Gerhard promised to look into the matter and obtain a breakdown for us. But before Carte Blanche got an answer, Sanlam had contacted Imthiaz directly. We received an e-mail from Sanlam stating that, 'Due to insufficient communication he misunderstood that Sanlam Life would charge a fee. The policy is being converted as he wanted'. They have now transferred his funds, with no costs whatsoever. While Insurance companies maintain that most policies are worthwhile if taken to full term, Rob Rusconi says that the costs involved do not compare favourably with international trends.
Devi: 'Is it expensive to save?'
Rob: 'It is expensive to save, particularly in certain ways. And from that point of view we as a country are doing our citizens a disservice. Because we as a country are interested in how well our citizens save for retirement. We want our citizens to save for retirement.'
Devi: 'Because otherwise we become a burden to government?'
Rob: 'Exactly right.'
Cynics are quick to point out that the insurance companies' first priority is to make a profit for their shareholders.
Bruce: 'And when you see the sort of salaries that are paid to senior executives. When you see what Mike Levitt of Old Mutual retired with... They won't disclose the figures, but I estimate that he went into retirement with 300 million. Is that fair on people who are getting nothing?'
Vuyani: 'A retirement annuity fund is a saving for retirement and it should never be treated as a pure insurance product.'
Devi: 'Knowing what you know now, would you take out an RA?'
Thabiso: 'I don't think so.'
Jaco: 'Rather go to a bank and open a small savings account. Rather put your 200, two and a half, 500 or whatever you can afford. Rather invest it. I think it's safer there.'
Henrietta: 'If I put my money under my bed I would have still had it.'
Gerhard: 'Your money is in very safe hands. This industry has enormous capital reserves. Your money is safe and that's the most important message.'
Vuyani: 'I am not here to recommend that people stop making contributions to retirement annuity funds. And I also can't testify and say 'They are great products' - I don't know that.'
IMPORTANT DISCLAIMER:While every attempt has been made to ensure this transcript or summary is accurate, Carte Blanche or its agents cannot be held liable for any claims arising out of inaccuracies caused by human error or electronic fault. This transcript was typed from a transcription recording unit and not from an original script, so due to the possibility of mishearing and the difficulty, in some cases, of identifying individual speakers, errors cannot be ruled out.