The problem with laws is that the law of unintended consequences often follows hard on the heels of the best intentions of the legislature.
Such is the case of the recent amendments to the Pension Funds Act which ban commission and/or trail fees being raised for the transfer of a retirement annuity (RA) from one product provider to another.
The intention of the amendment is to stop unscrupulous financial advisers taking unfair advantage of another section of the new legislation which stipulates that RA fund members are entitled to switch between RA funds. The purpose of the new legislation is to make the life assurance industry, with its high-cost and contractually inflexible RA products, more competitive.
The unintended consequence is that the life assurance industry, or at least some of its players, is taking the opportunity to do everything it can to block the intention of the legislature amendments, which is to increase competition in the industry.
Rule changes
Sanlam, for example, has changed the rules of its particularly controversial and high-cost Central Retirement Annuity Fund (CRAF) and is making unrealistic demands on companies to which you may wish to transfer your RA.
This is the case even where an RA may have matured and it is in the best interests for the RA member to transfer to a lower-cost, more flexible offering that has no penalties for reducing or stopping payments.
So, instead of creating new, more competitive products, Sanlam is doing its best to block RA members from moving to better offerings elsewhere.
The main problems with most life assurance RAs are:
- High costs. Research by independent actuary Rob Rusconi shows that the costs of life assurance RAs can reduce your end benefit by as much as 50 percent over the 40 years you should be saving for retirement. Against this, a unit trust's costs will reduce your end benefits by about half the amount.
In other words, you may feel you have got a reasonable return on your life assurance RA but say you receive an end benefit of R1.5 million from a unit trust RA, you would have only receive R1 million from a life assurance RA on an RA which would mature with R2 million with no costs. Obviously there will always be costs; it is the extent of the costs that matters.
- Inflexible contracts. If you stop paying or reduce your premiums, even if it is through no fault of your own, you are severely penalised. These confiscatory penalties, imposed on you for reducing or stopping the payment of contributions to a life assurance RA, have been limited by government but they can still be horrific, and can result in a loss of up to 30 percent of your accumulated savings.
The best alternative to the life assurance products are unit trust management company products. They are the cheapest and you can increase, decrease or stop making premiums without any penalty.
Be careful not to muddle a unit trust product with an offering by a linked investment services provider (Lisp).
Lisp products, which give you the option to choose between the unit trust funds of a number of management companies, come at costs that can be as high as those of the life assurance companies, particularly if there are a number of investment layers.
You need to be particularly careful of fund of funds offered by some financial advisers.
The Lisps, however, do not have the confiscatory penalties of the life assurance companies.
Usurping regulator's role
One of the problems with Sanlam is that it is now presuming to assume the role of the regulator.
Sanlam has changed the rules of CRAF that, among other things, state that a new recipient fund must guarantee in writing that "no commission or other remuneration" is being paid in respect of the amount that is being transferred.
There are two problems with this scenario:
1. How can the recipient RA fund know of any arrangements between an RA member and a financial adviser?
2. The amendments to the Pension Funds Act relating to fees or commissions for financial services providers (FSPs). Many unit trust companies and Lisps are registered as FSPs, which could mean that the Sanlam rules could be extended to cover the product providers as well as financial intermediaries when the new law is promulgated.
FSB's role
There is no mention in the legislation that the payment or non-payment of any commissions or fees must be policed by the company losing the business.
It is up to the Financial Services Board (FSB), as the regulator, to ensure that this is the case.
If there are no penalties to be applied because, for example, an RA has matured, there is every reason why you should transfer to a lower-cost, more flexible product than CRAF. The most important reason is you will get more money at retirement.
Sanlam argues that the trustees of CRAF (who incidentally are appointed by Sanlam) amended the rules in the best interests of RA fund members.
My response to this argument is to ask why the trustees have only now started worrying about the fund members.
For how many years have fund members been offered an underlying Sanlam life assurance product that is high-cost and has confiscatory penalties? And, added to this, Sanlam's asset managers have until recently provided sub-optimal returns.
And still these trustees have not switched the underlying investment structure to replicate a unit trust fund with its associated lower costs and the flexibility to increase and decrease contributions without penalty.
If they had done or would do so, it would get rid of the upfront commission structures that come with life assurance products and which have and are the main reason why there is so much unnecessary churning of the investments of individuals by unscrupulous financial advisers.
In other words, the life assurance companies and the trustees of their RA funds created the problem and are now trying to play the innocents.