Assurers can’t decide for you how to invest matured benefits
May 29 2011 at 12:15pm
By Bruce Cameron
Illustration: Colin Daniel
Life assurance companies, which could now face significant claims, can no longer decide for you how your money will be invested once your retirement annuity (RA) matures and you have not told the company what to do with the money – unless the life company has properly informed you beforehand how it will invest your matured benefits.
And based on a recent determination by the life assurance ombudsman, a similar principle applies to life assurance endowment (investment) policies (see “Vague options on maturity: life policy payout increased”, below).
Life companies have various ways of dealing with your money at the maturity of an RA or an endowment if you have failed to tell the company what to do with your benefits. The options include:
* The benefits are paid into a cash portfolio that may or may not pay competitive money market rates; or
* The money is left in the current investment portfolio, either on an open-ended basis or simultaneously with the renewal of your contract for a further five years.
The practice of transferring unclaimed benefits to a cash portfolio sparked widespread complaints from RA fund members and life assurance endowment policyholders when their investment market-linked portfolios provided returns above the cash portfolio rates in the period between maturity and the payment of their benefits.
But the flip side is that when life companies left matured benefits in under-performing market-linked portfolios, RA members and endowment policyholders demanded that they be paid the value they would have received at the maturity date.
This week, Elmarie de la Rey, the Acting Pension Funds Adjudicator, issued a determination in which she ruled that life companies cannot, without your knowledge, automatically switch your matured benefits into a cash portfolio (see “You must be told that your matured benefits will be moved to a cash fund”, below).
The determination could open the way for members of matured RA funds to lay claims to be paid out higher maturity benefits.
The adjudicator’s ruling supports similar rulings on endowment policies by the Ombudsman for Long-term Insurance. Deputy long-term insurance ombudsman Jennifer Preiss says that “the provisions of the policy will be important in determining what should happen at maturity and also the maturity letter that the insurer sends to the client. So each case differs, depending on these terms.”
Based on rulings by the adjudicator and the long-term insurance ombudsman, a complaint is unlikely to succeed if a life company has informed you upfront that it will transfer your matured benefit into a cash portfolio.
However, you may have grounds for a complaint if you have not received a market-related return from a cash portfolio or have been charged excessive costs.
Consequent to the determinations, the life industry body, the Association for Savings & Investment SA (Asisa), says that it is in the process of developing an industry standard for unclaimed benefits.
Peter Dempsey, Asisa’s deputy chief executive, says the standard is needed because each company has a different protocol for how it invests matured benefits in the absence of a client’s instructions.
Once implemented, the standard will set down the minimum requirements to which Asisa member companies must adhere when tracing clients who have not claimed their benefits or who have not issued instructions.
The standard will set out disclosure requirements about what you must be told and when, and guidelines for how unclaimed matured benefits must be invested.
Dempsey says that currently once a life-linked RA policy reaches its contracted maturity date and the fund member has not given the pro-duct provider specific instructions on how the benefits should be invested, the life company has the following options:
* Leave the money where it is. But if the underlying investment is market linked and the market drops significantly after maturity, the member may try to claim the original value as at maturity. If granted, such claims would impact negatively on the existing members.
* Move the matured benefit into a money market fund until the client issues specific instructions on what should be done with it. This protects the maturity value, as well as the existing fund members.
Dempsey says that either of these options should be provided for in the rules of an RA fund and, ideally, in the policy contract, both of which should be made available to fund members. Therefore, he says, the issue is not so much about how the company invests the benefits at maturity, but whether its decision is communicated properly to the fund member upfront.
Industry sources say that De la Rey’s determination could spark many more complaints, which may have significant cost implications for the life industry.
RULING IS FAIR, SAYS LIBERTY
Acting Pension Funds Adjudicator Elmarie de la Rey’s determination on the transfer of matured benefits to a cash fund is “reasonable and fair”, Liberty Life says.
Liberty will not lodge an appeal against the ruling, Mandy Denton, Liberty Life’s head of corporate communications, says.
The determination confirmed “our view that the product and the transfer of funds during the maturity process itself are appropriate and with merit”.
Denton conceded that the maturity letter sent to the policyholder “did not state with sufficient clarity that the funds would be transferred to an alternative portfolio”.
When the issue was raised, Liberty unsuccessfully attempted to resolve the dispute with the policyholder directly, resulting in the matter being referred to the adjudicator, Denton says.
“We welcome the resolution of the matter.
“To ensure this situation doesn’t recur, we have revised our maturity letters relating to this product and portfolio to ensure that the communication is explicit and clear. This was done last year in February.
“We also have an ongoing programme to simplify policy correspondence across our product lines,” Denton says.
YOU MUST BE TOLD THAT YOUR MATURED BENEFITS WILL BE MOVED TO A CASH FUND
Acting Pension Funds Adjudicator Elmarie de la Rey this week ruled that Liberty Life and its Lifestyle Retirement Annuity Fund cannot simply transfer the benefits of a matured retirement annuity (RA) into a cash fund if the RA member has not been explicitly informed that this will happen.
The determination involved two RA policies sold by the Prudential Insurance Company. Prudential was later merged with Liberty Life, which took over Prudential’s business.
The adjudicator ruled against Liberty on the one RA and in favour of Liberty on the other RA.
The complainant, a Mr RH, took out the first RA on July 1, 1985, with a maturity date of July 1, 2009, and the second RA on December 1, 1983, with a maturity date of December 1, 2009.
Prudential merged with Liberty Life on March 1, 2007.
Both RAs were invested in smooth bonus with-profit life assurance policies, which have balanced portfolios that invest in the main asset classes of equities, bonds, property and cash.
At maturity, the first RA had a value of R1 991 551.65 and the second RA was worth R1 066 918.28.
RH told the adjudicator that he believed that when the policies matured the benefits would stay invested in their pre-retirement portfolios until further notice. However, when the policies matured, Liberty Life transferred the accumulated savings of both policies to the Standard Bank Money Market Portfolio.
Liberty continued to charge the same management fees as it had before the transfer – 1.92 percent a year on the value of the assets. After RH complained to the adjudicator, Liberty offered to reduce the fees to 0.5 percent a year, and later to zero.
Liberty also incorrectly deducted tax of 18 percent from the income paid by the money market portfolio.
RH complained that he was dissatisfied with Liberty’s decision to transfer his RA memberships from a with-profit portfolio to the Standard Bank Money Market Portfolio on maturity without his being informed.
RH said that he became aware of the first transfer only in August 2009. He asked the adjudicator to rule that he should receive the higher return of the with-profit portfolio for that period.
Liberty argued that the rules of the first RA did not allow for membership of the fund to be extended after maturity and so RH should not have received any further investment growth on his retirement savings.
Liberty argued that the transfer to the money market portfolio “was a more transparent way of ensuring that members who opted to defer retirement continued to get growth on their proceeds after maturity”.
De la Rey says RH was told by Liberty Life that his membership of the fund would continue automatically until he requested payment. RH misunderstood this to mean that his membership would continue on a “with-profits” basis.
De la Rey made the following determinations:
* First RA. The policy documents “do not clearly state that there would be a switch to a money market portfolio after retirement. However, by November 19, 2009, the [Liberty Group] had explained by letter to the complainant that his retirement benefit would remain in the money market portfolio until he advised of an alternative portfolio. The complainant should have given further instructions about investing his retirement value from his first membership by December 1, 2009,” the adjudicator says.
De la Rey ordered Liberty to add a net return of 11.55 percent a year to RH’s normal retirement value for the period July 1, 2009 to November 30, 2009, plus Standard Bank Money Market Portfolio returns on this amount from December 1, 2009 to the date on which it credited RH’s fund value.
* Second RA. Liberty Life had acted correctly and so RH should not be granted any relief, because Liberty had informed RH before his policy matured that he must select a new portfolio. This information was provided by the Liberty Group in its letter dated November 19, 2009, addressed to RH, De la Rey says.
VAGUE OPTIONS ON MATURITY: LIFE POLICY PAYOUT INCREASED
A life assurance company that was vague when it told a policyholder what would happen to his money once his policy matured has had to increase the man’s benefit after he realised that his money had not been invested as he had presumed it would be and he sought the intervention of the Ombudsman for Long-term Insurance.
In the absence of specific instructions from the policyholder, the assurer (which the ombudsman did not name in his ruling) renewed the term of the life assurance policy for a further five years when it matured in August 1999 with a value of R79 166. The life company transferred the money to a deferred maturity call portfolio.
In 2002, the life company told the policyholder’s financial adviser in a fax: “The policy matured in August 1999, and when the claim is processed we will pay the client R79 166 plus interest calculated with an annual effective rate of seven percent.”
Until the time he complained to the ombudsman, the policyholder was provided with various policy values, peaking at R103 195 in July 2003.
However, when he decided to cash in the policy in June 2005, he was told that it had a value of R101 285. According to the policyholder’s calculations, at an interest rate of seven percent a year, the policy value should have been about R118 806.
In its response to the complaint, the life company said that, as no instructions had been received from the policyholder, his funds were automatically reinvested in a deferred maturity call portfolio for five years, at the end of which it had a value of R98 664. The assurer claimed the quoted rate of seven percent was not guaranteed into the future but was simply the rate payable at the time it sent the fax.
In his determination, Judge Brian Galgut, the ombudsman, says that it was pointed out to the assurer that there did “appear to be room for more than one interpretation” of the letter it sent to the policyholder in 1999. The policyholder was never informed what would happen if he did not select one of the options.
Galgut says it was reasonable for the policyholder to have relied on the impression that the assurer would pay him the maturity value plus seven percent a year at the date that his claim was processed, whenever that might be.
But Galgut found that when the policy matured for the second time in 2004, the policyholder was properly informed of the options and what would happen if he failed to make a choice. He was told: “We will automatically reinvest your proceeds in our deferred maturity portfolio if we do not hear from you.”
Galgut proposed that an equitable resolution would be for the man to receive the maturity value of R79 166 on August 1, 1999, plus seven-percent annual interest up to July 31, 2004, plus a return equivalent to that earned in the deferred maturity portfolio from August 2004 to the date of payment. The policyholder accepted a payout of R117 300, calculated on that basis.