How ethical are penalties, fees?

“Reasonable” services questioned

By Andró Griessel

26 June 2021

The penalties charged on the pre-mature cancellation of contractual savings products have been bugging me since 2004.

Turn the clock forward another 17 years and like the cat with nine lives or the robot from The Terminator, this unethical practice just does not seem to die out.

My lawyer friend warns me against possible defamation suits from one or all of the companies, but in some way, I actually welcome it, for then the subject would finally get the necessary exposure in the media and public.

Over the last 17 years we have extensively conveyed, deliberated, and communicated with the insurance companies (mostly Old Mutual and Sanlam) about termination values on policies.  If you look at cases submitted to the Long Term Insurance Ombud, you will find hundreds of these complaints.

I am not aware of one case that was won by the client, and therefore the practice continues.

The following recent example illustrates, in my opinion, the unethical (although legal) practice of an insurance company.

In 1993, a client took out a contractual Retirement Annuity with Old Mutual with an initial premium of R 500 per month that escalates with 20% annually. The maturity date of the policy is 1 Oct 2027.

By 2012, the premium had increased to R 15 974.24 pm, so the client decided to stop the premium increases, although he continued paying the monthly premium.

Based on our experience with these types of products we recommended that he transfer the funds via a Section 14 transfer to a non-contractual unit trust-based annuity.

Below is an extract of the offending transfer document provided by Old Mutual, as well as an extract from the original policy document.

According to a document that was supplied to us by Old Mutual, the current cost associated with this policy is around R363.71 per month.

Therefore, if you take the remaining 75 months of the policy into account, Old Mutual can justifiably only deduct transfers costs of around R 27 278.

However, since they would receive it as a lump sum, instead of monthly, it would be reasonable to apply a discount factor of at least inflation (4%), which would bring the amount to R 24 100.

Old Mutual however still sees it fit to charge a transfer fee of R 419 821 to release our client from his contract.

After enquiring with them about the high transfer fees for the umpteenth time, we received the same answer as many times before:

“When a flexi policy is issued, certain expenses are incurred. These expenses include the cost of setting up the computer records, printing and distributing the policy information letter and policy contract, medical expenses where applicable, commission, commission related and then of course, overheads which include the cost of salaries, rental, staff training, etc.

“The Flexi range of policies was designed in such a way that the initial expenses incurred in setting up the policy would not be recouped immediately but spread over the full term of the policy. In this way, the policy could immediately start participating in growth, rather than using the initial premiums to offset the expenses incurred.

“We are guided by the Statement of Intent agreement between the Minister of Finance and the Long-Term Assurance Industry that was entered into in principal shortly before the end of 2005.”

At the end of May 2021, the fund value of this policy was R 5 403 583, which translates to an internal rate of return of 8.40% per year since inception.  The client has been invested in the Old Mutual Performance Profits Balanced Portfolio from the beginning.

At the time of writing, we were not able to get a fact sheet of this specific fund, but the name suggests that it can be compared with a normal balanced type of fund.

We then had a look at how the performance of this fund compared to Old Mutual’s own balanced fund and another well-known balanced fund (fund 3).

The annual returns were respectively 8.50%, 10.65% and 12.23% since 2000.

If we therefore assume that the client was able to transfer his investment at the beginning of 2000 (when his fund value was only R 86 000) to the Old Mutual Balanced Fund, his fund value today would have been R 6.7 million or R 7.9 million if invested in fund 3 (12.23% return).

Is Old Mutual possibly trying to protect their assets by way of the transfer costs because the actual return that they are receiving in the fund is more than the return they are passing on to the investor?

Or maybe they are clinging to their asset management fees of around R 80 000 per annum?

Or is the answer simply that they charge the maximum possible because they are allowed by the finance minister to charge 17 times more than what is ethically justifiable?

We have tried to argue both sides of the coin, but we come to the same conclusion time and again; these penalties are morally unjustifiable.

It astonishes me how this is still allowed under regulations regarding Treating Customers Fairly.

In Old Mutual’s latest financial results the CEO, Ian Williamson, refers in his report to Old Mutual’s goal to “champion mutually positive futures every day”.

I am not sure if he only refers to shareholders and management, but hopefully this includes Old Mutual’s policyholders who are entrusting their hard-earned money to the company.

If I however would be lucky enough that my writing lands on his desk, I would plead with him to align his goal with what is happening on the ground and be the trendsetter in ridding the industry of unethical penalties.

Andró Griessel is a certified financial planner and managing director of Woodland Wealth (Previously ProVérte Wealth and Risk Management). Contact him at info@woodlandwealth.co.za.

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. Woodland Wealth is an authorised financial service provider with FSP no. 5966.