For years the life assurance industry has been astute at using the law to protect its own selfish interests, often putting you, the policyholder, at a disadvantage.
This week and over the next two weeks, I will be dealing with this issue, which can best be described as legal arbitrage (finding the gaps between one law and another), and what you can do to protect yourself.
Over the past two weeks, and again this week, Personal Finance has focused on rulings handed down by the Pension Funds Adjudicator, Vuyani Ngalwana. The essence of these rulings is that when you enter into a contract to contribute to a retirement annuity (RA), your contract is governed by the Pension Funds Act and not the Long Term Assurance Act.
However, when the life assurance industry sells you an RA, it claims that you are entering into a life assurance policy contract, which is governed by the Long Term Assurance Act, and not signing up for membership of a pension fund, which is governed by the Pension Funds Act.
If you sign up for a life assurance policy contract, you have dramatically fewer rights than you do under the Pension Funds Act.
The essence of a life assurance contract is that you agree to pay a life assurance company a fixed amount of money (either as a lump sum or as a regular premium). In turn, the life company promises to give you something back at the end of the contract term. What you get back is called a benefit, which is the return on your investment less costs and tax.
For example, you could ask the life company to invest your money in shares listed on the JSE Securities Exchange. But then comes a catch: the life company is not even obliged to invest as you say. It can invest in chicken farms in outer Mongolia if it so wishes. (It is not that such way-out investments necessarily happen; the point is that they can.) What the life company does have to do is provide you with a return that would approximate the returns of the JSE less costs and tax.
You virtually lose control of your money from the moment you invest your savings. A life company can and does dictate what you will get back. The amount you receive can be affected by an array of costs, including the payment of upfront commissions, that are hacked off your investment along the way. Furthermore, the life industry often writes contracts that allow it to alter the cost structures at its discretion. Even the experts can find these cost structures unfathomable.
If you are not satisfied with the returns you receive at the end of the contract period, there is nowhere to take your complaint. The life industry precludes its ombudsman's office from entertaining complaints about investment performance.
The Pension Funds Act, on the other hand, gives you a lot more protection. For a start, your money must be invested in terms of the rules of your fund and the Act. Secondly, a fund must be governed by elected or appointed trustees, who must act in the best interest of the fund. And you can complain to the Pension Funds Adjudicator if you are not satisfied with the way your retirement savings have been managed.
It is this difference in approach that is behind the rulings handed down by Ngalwana over the past three weeks.
The backbone of his rulings have been that the Pension Funds Act - not the Long Term Assurance Act - applies when you sign up for an RA product. The policy issued is between a life assurance company and the fund (the trustees), and not between you and a life assurance company.
To quote Ngalwana, "When a person joins a retirement fund, he or she does just that; he or she does not take out a policy or buy a policy with a life assurer."
One of the consequences of this, the adjudicator has ruled, is that you cannot be hammered with charges that are not included in the rules of the RA fund. These charges include excessive penalties for either reducing or stopping your contributions.
What has often happened is that complaints about RA funds have often been referred to the Long Term Assurance Ombudsman, who has considered the complaints within the framework of the Long Term Assurance Act and not the Pension Funds Act. As a result, the complaints have not been upheld.
So, if you find that charges have unreasonably reduced your benefits, or the returns from an RA do not meet your reasonable expectations, or you have been hit by excessive penalties, take your complaint to the Pension Funds Adjudicator. You are far more likely to get a ruling in your favour.