A life policy with a low premium may be affordable now, but you may face hefty premium increases when you want to renew the contract.

Before you buy a life assurance risk policy simply because it offers the lowest premium, be sure you understand just how the policy is priced and what premium increases you may face later on.

A life risk policy pays out on death, disability or dread disease.

Steep premium increases during the term of the policy, when a guarantee period ends or if you renew the contract can make a policy that looks competitive now unaffordable some 10 or more years later.

At that stage, new risk cover may be very expensive or your health may have deteriorated, making you uninsurable or subject to a premium loading or an exclusion from certain benefits.

Life companies have different premium patterns in a bid to ensure there is a policy to suit every pocket. Although this may help those who could otherwise not afford life cover, it also has nasty surprises for those who are unaware of how the premium patterns play out.

Recently, for example, a man who took out a life policy with Sage Life in 2001 for more than R8 million was faced with a premium increase of 52 percent when the 10-year premium guarantee expired.

Mr A, who was 58 when he took out the policy, is now 68.

The R8-million cover had escalated to R12.8 million, and the premiums to R25 446 a month, before the premium guarantee expired.

Under the guarantee, the premiums escalated at 10 percent a year, and the cover at five percent.

Momentum, which had taken over the policy from Sage, reviewed Mr A’s premiums at the end of the guarantee period and said he would have to pay R38 709 a month for cover of R13.4 million (five percent more than in the previous year).

Alternatively, Momentum offered Mr A the option to reduce his cover to R9.8 million and pay an increase of 10 percent, or R27 629 a month.

Mr A was so annoyed that he cancelled the policy, despite losing on the investment portion of the policy as a result of a surrender penalty.

Mr A was able to renegotiate an existing Altrisk policy on better terms to replace some of the cover he had on the Sage policy.

Philip du Preez, Momentum Retail’s head of insurance products, says Mr A’s policy was not priced for life; the premiums were set for the 10-year guarantee period and were to be reviewed based on his age at the end of that period.

Only 38 percentage points of the premium increase Mr A faced were a result of the review at the end of the 10-year period. The other 14 percentage points of the increase were a result of the compulsory annual increase and to accommodate the increase in cover, Du Preez says.

The best way to determine if an increase is fair is to compare the difference between the premium the person would pay at the date of inception of the contract and the premium he or she would pay at the end of the guarantee, he says.

If Mr A took out a new policy now at the age of 68, his premium would be more than double, so the 38-percent increase offered to him to maintain the cover “is not excessive”, Du Preez says.

Mr A says that when he took out the cover, the life assurer never disclosed to him that the premium could escalate so steeply.

He would not have taken out the policy if he had known he would be in for an increase of more than 50 percent 10 years later, he says.

In 2006, five years after Mr A took out his policy, the Association for Savings & Investment SA (Asisa) introduced a Code of Policy Quotations that forces life assurers to disclose how premiums may increase at the end of a contracted term or premium guarantee (see “Disclosures on future increases”, below).

Peter Dempsey, the deputy chief executive of Asisa, says if you buy a policy with a premium that is set for a period shorter than the term of the contract, you must understand the basis on which the assurer will re-price the contract: will it consider your age or other factors, such as how much it has paid out in claims?

There are no laws, regulations or codes that limit the increases life assurers may impose when they re-price contracts, Dempsey says. If your policy has a guarantee period, check the contract to see whether or not there is limit to the increase that may be imposed thereafter, he says.

DISCLOSURES ON FUTURE INCREASES

Life assurers that sell life policies on which the premiums are not set for the full term of the contract have to disclose to you how they expect your premiums will increase, an industry code on policy quotations says.

The Association for Savings & Investment SA has a Code of Policy Quotations, which includes a provision stating that life assurance companies must disclose to you the expected impact of the planned premium increase during the term of the contract.

The code says in making its disclosure to you, the life assurer must spell out the assumptions that it will use when reviewing your policy – for example, the fact that you will have aged and/or the value of its reserves, as well as the method it will use to review your premiums.

The code also deals with policies that have been priced for the term of the contract but contain a clause stating that the life assurer can increase the premium if its experience of claims to premiums makes this necessary.

It says if aggressive assumptions are used in the pricing, and it is likely that the premium will increase at the end of the policy term, the life assurer must make this clear to you, and it should illustrate the level at which the premium is expected to increase.

QUESTIONS YOU SHOULD ASK

When you take out a life assurance policy, you would do well to ask some questions about the premiums, Peter Dempsey, the deputy chief executive of the Association for Savings & Investment SA, says.

You should first ask yourself how long you want to keep your policy, and consider whether you want to have certainty about the premiums you will pay and the amount of cover you will enjoy over the term of the policy, Dempsey says.

Then ask the life assurer, or your financial adviser who presents you with quotes, to show you how the premiums and the cover will change over the life of each policy, he says.

Weigh up the total cost of the premium on the policy that gives you the certainty you need for the period you require the policy and assess its affordability, Dempsey says.

If the premium is not affordable and you need to accept a premium guarantee or review to make it more affordable, find out what the policy contract states about the terms of the premium increase at the end of the guarantee or on review, he says.

DON’T COMPARE ONLY ON PRICE

You should never compare life policies on their premiums alone because the benefits of different policies are seldom the same.

Another good reason not to compare what may appear to be two similar policies on the basis of their starting premiums is that the future premium increases may differ vastly.

Even comparing the initial premiums from direct insurers 1Life Direct, Instant Life and Frank.net, for example, requires projecting the premiums and their increases over the terms of the contracts.

1Life Direct does not increase its premiums for the first two years, and but thereafter premiums rise by five percent a year. Instant Life increases its premiums by 7.5 percent a year and Frank.net by six percent a year. All three of these assurers guarantee their increases for five years only.

Instant Life premiums could increase or decrease after five years depending on the assurer’s experience, Jan Kotze, its chief executive, says. The factors that could affect the premiums include excessive violence in the country or an epidemic, he says.

Lenerd Louw, Frank.net’s chief executive, says there is a very small chance that Frank.net would change the premium increase after five years, but having the opportunity to do so enables the assurer to get better rates from its reinsurers.

Laurence Hillman, the managing director of 1Lifedirect, says the 1Lifedirect’s premiums are guaranteed not to increase by more than 15 percent after the first five years.

1Lifedirect also has level-premium products where the premium is guaranteed not to increase for the whole of your life, Hillman says.

1Lifedirect allows you to increase your cover by 25 percent every three years or on any significant event, such as buying a home, without the need for medical underwriting other than testing negative for HIV. A new premium would be set for the increased cover, Hillman says.

Instant Life offers you the ability to increase your cover by five percent a year if you pay an additional five percent in premiums.

Frank.net currently allows you to add to your cover at a new premium, but is planning in future to offer add-on products, including one that escalates your cover annually.

Instant Life offers a cash-back benefit equal to 20 percent of your premiums every 10 years. You will need to make an assumption on whether you will keep the policy for 10 years before factoring that benefit into the total cost of your premiums.

The direct insurers’ offerings are relatively simple. When it comes to the more established assurers, the benefits and premium patterns are more complex.

Discovery Life, for example, offers policyholders who are also members of Discovery Health Medical Scheme and Vitality an initial premium discount of between 15 and 20 percent, depending on their medical scheme option. However, future premium increases then depend on your Vitality status, and your claims through Discovery Health and can erode the upfront discount.

Vitality is Discovery’s wellness programme that rewards healthy behaviour.

To determine how your premiums will increase on a Discovery policy with this integrator relative to another policy, you will have to make some difficult assumptions about your future health status and your ability to reach a particular Vitality status.

The increases are subject to caps and you can never be worse off than you would have been had you not chosen the integrator option, but you may need to consider the worst-case scenario of what can happen to your premiums when you make comparisons.

You also have the potential to earn a payback benefit equal to, or even higher than, your increases, if you keep the policy for five years, Kenny Rabson, the deputy chief executive of Discovery Life, says. Any claims on the policy reduce this payback benefit.

The Pension Funds Adjudicator recently issued determinations dealing with three long-standing but important principles related to retirement fund benefits.

The Pension Funds Adjudicator recently issued determinations dealing with three long-standing but important principles related to retirement fund benefits of which you, as a member of a fund, should be aware.

1. Fund trustees need to be diligent when granting loans

The Pension Funds Adjudicator has found that a retirement fund should not have granted the numerous loans it did to a fund member, and therefore the loans could not reduce his former spouse’s share of his savings in the fund.

Acting adjudicator Elmarie de la Rey referred her determination to the head of surveillance in the office of the Registrar of Pension Funds at the Financial Services Board (FSB) for possible further action against the fund and its administrator, NBC, for granting the loans in contravention of the Pension Funds Act.

GZ, the former wife of BZ, a member of the Nampak Contributory Provident Fund, complained to the adjudicator’s office, because she had expected to be paid out about R51 000 from her former husband’s fund, but was paid only R5 300.

The couple were divorced in 2005. In terms of the divorce order, GZ was entitled to half of BZ’s pension interest, but, in terms of the law as it then stood, the money could be paid to her only when BZ retired, died or resigned from the fund.

In 2007, the Pension Funds Act was amended, introducing the principle of a clean break in pension fund interests after divorce. This paved the way for former spouses to obtain immediate access to any portion of a member’s interest awarded to them in a divorce order.

In 2008, GZ requested that her share of the money in the Nampak fund be transferred to her.

The fund paid her out her share of the pension interest at the date of the divorce order but deducted half of the outstanding loans, which had been made to the member before the divorce and which by then amounted to R92 179.

The Pension Funds Act provides for funds to grant loans to members, or to guarantee a loan granted to a member only under strict conditions. These are to acquire property on which a residence has been or will be erected, to erect a residence on property owned by the member or his or her spouse, or to make additions, alterations or repairs to a residence. The member or a dependant of the member must occupy the residence.

GZ complained to the adjudicator that she was married to BZ in community of property and was not aware of any loans made to him from the fund. During their marriage, they had not owned a home but stayed in a house provided for by a family member.

De la Rey asked the Nampak Contributory Provident Fund for a copy of the loan agreement and was provided with a list of 12 different loans ranging from less than R3 000 to R20 000, taken over a period of 10 years.

She says it is apparent from the submitted list of the loans that they could not have been for any of the purposes provided for in the Pension Funds Act.

The fund and its administrator conceded as much, she says, because they state that it was not their duty to verify the purpose for which the loans were used.

But De la Rey says the Pension Funds Act does require funds that grant such loans to be satisfied that the loans are for housing purposes.

“No questions seem to have been raised by the frequency of the loans and the amounts involved, which ought to have alerted any responsible person that the loans could not have been for housing purposes,” she says.

As a result, the acting adjudicator decided to send her determination to the FSB and ordered the fund to enhance GZ’s benefit by 50 percent of the amount outstanding on all the loans as at the date of divorce.

GZ also complained that she was not given a breakdown of how her benefit was computed.

De la Rey says the Supreme Court of Appeal had ruled in a case before it that a fund must provide such information.

The Nampak fund was ordered to supply the information.

Take care when your divorce order is drawn up and your spouse had a housing loan from his or her retirement fund or even a guarantee for a housing loan from the fund.

The amount still outstanding on these loans may be taken into account when your share in your former spouse’s pension fund is calculated.

In the case of GZ and the Nampak Contributory Provident Fund, De la Rey found the outstanding loan amounts could not be deducted from the non-member’s portion because the fund had not checked that these loans were for housing purposes.

However, in an earlier determination, Farrell vs the Cape Municipal Fund, the adjudicator found a fund was within its rights to calculate the non-member former spouse’s portion of the pension interest after deducting the value of the outstanding loan amount from the pension interest.

Even if your spouse plans to continue to pay off the loan, an amount reflecting the outstanding balance on the loan at the date of divorce may be deducted from the pension interest before it is split as specified in the divorce order.

The fund may not actually settle the loan – the deduction of the outstanding amount simply ensures there is enough left in the fund to cover the loan.

Non-member spouses should check with a fund whether there are any outstanding home loans or home loan guarantees before drawing up a divorce order, Karin MacKenzie, a pension lawyer and director at Herold Gie Attorneys, says.

MacKenzie says it appears from the adjudicator’s Nampak ruling that the loans were not made directly by the fund, but by an entity known as NBC Housing. The fund had stood guarantee on the loans.

The implication of this latest ruling and the Farrell one taken together is that if your former spouse’s fund stood guarantee for a home loan from a bank, the amount of the guarantee could also be deducted from the pension interest before it is split.

But, MacKenzie says, the issue is controversial and some lawyers believe the outstanding amount cannot be deducted from the amount allocated to the non-member spouse unless there is a shortfall in the member’s remaining portion to cover the loan.

2. Nominated beneficiaries are not automatically entitled to benefits

If a retirement fund member nominates you as a beneficiary, it does not necessarily mean that you will receive a death benefit.

Trustees are obliged to consider the nominated beneficiaries, but they are bound by law to distribute death benefits to the dependants of the retirement fund member.

Nominated beneficiaries who are not dependants of a deceased member may not receive any benefits if the trustees decide that the dependants need all the money the fund will pay out.

This was the case in a complaint that came before the office of the Pension Funds Adjudicator recently.

Elmarie de la Rey, the acting adjudicator, dismissed the complaint brought by the daughter-in-law of a member of the Sappi Pension Fund, because the woman’s claim was based on the fact that she was a nominated beneficiary and not on the basis that she was a dependant.

The Sappi Pension Fund distributed a death benefit of R108 408, which became available when one of its pensioner members, NK, died in 2010.

The trustees decided to give 80 percent of the benefit to the member’s son, MK, and 20 percent to the member’s adopted daughter, because they were both dependants.

The board of trustees told De la Rey that, because the benefit to be distributed was relatively small, no allocation was made to MK’s wife, SK. The trustees had assumed that SK would derive some benefit from the allocation because she shared a home with her husband.

The member had nominated his son and his daughter-in-law as beneficiaries of his death benefit and had stipulated that they should receive 50 percent each.

De la Rey says in her ruling that, although the deceased member may have expressed an intention to benefit certain people in the nomination form, it does not necessarily imply that the nominees will, in fact, be awarded anything.

The deceased’s wishes, as contained in the form, are only one of the factors taken into consideration when allocating a death benefit, the ruling says.

Quoting from a High Court ruling, De la Rey’s ruling says that section 37C of the Pension Funds Act, which deals with the distribution of retirement fund benefits, “was intended to serve a social function. It was enacted to protect dependency, even over the clear wishes of the deceased.

“The section specifically restricts freedom of testation in order that no dependants are left without support … The fund is expressly not bound by a will, nor is it bound by the nomination form. The contents of the nomination form are there merely as a guide to the trustees in the exercise of their discretion.”

SK cannot claim to be entitled to a portion of the death benefit because she is a nominated beneficiary of the deceased, and she had not submitted that she was a dependant of the deceased. Therefore, there is nothing to suggest that the trustees of the Sappi fund erred in their decision on how to allocate the member’s death benefits; they acted rationally and arrived at a proper and lawful decision, the acting adjudicator says.

3. In cases of misconduct, your employer has a claim to your benefit

If you leave your job, especially if you are fired due to misconduct, your employer is, under specific circumstances, entitled to demand that money from your pension fund be withheld from you.

And even appeals to the Pension Fund Adjudicator will not get the money released if your employer has acted correctly.

In a recent spate of rulings on this issue, the acting adjudicator, Elmarie de la Ray, rejected nine complaints from fund members, because she found that the withholding of withdrawal benefits in each case was in line with the requirements of the Pension Funds Act.

Another two complainants had their complaints upheld and their retirement funds were instructed to calculate and pay out their benefits as soon as possible.

De le Ray says the Act seeks to protect an employer’s right to recover losses caused by the misconduct of an employee. However, this is not an absolute right.

The requirements for a deduction by your employer from your retirement fund are:

* An amount must be due by a member of a fund to his or her employer;

* The amount must be due at the date of retirement or the date on which the member ceases to be a member of the fund;

* The amount must be in respect of compensation payable to the employer;

* The compensation must be in respect of any damage caused by the member (former employee) to the employer;

* The damage caused to the employer must be by reason of theft, dishonesty, fraud or misconduct by the member; and

* The member must have furnished a written admission of liability to the employer in respect of the compensation for the damages caused to the employer; or the employer must have obtained a court judgment in respect of the compensation.

In the first of the two complaints upheld by the adjudicator, the complainant was dismissed from his job following an incident involving the theft of about R188 000. The complainant did not dispute the fairness of the dismissal at a hearing of the Commission for Conciliation, Mediation and Arbitration, and criminal charges were laid against him by the employer. However, the criminal case was closed in August 2008 due to insufficient evidence.

De la Rey says in her ruling that there are no facts to show that the employer subsequently attempted to re-open the criminal case against the complainant or that it had instituted civil proceedings against him.

She accepts that an employer has a right to withhold a member’s benefit pending the finalisation of legal proceedings that allege theft, fraud or misconduct. But in this complaint there are no pending proceedings.

The fund’s decision to withhold the member’s benefit was set aside and the respondent was ordered to pay the complainant’s withdrawal benefit within 14 days of the determination.

In the second case, conditionally upheld by the adjudicator, the complainant had his retirement benefit withheld because his application did not reflect his tax number. The complainant was later advised that the retirement benefit was being withheld because civil action for R75 107 was pending against the former member.

De la Rey found that the complainant had not admitted liability for the amount in writing and no court judgment had been obtained by the employer. Further, there was no evidence to show that any further steps were taken by the employer besides issuing a summons in May 2007 against the complainant.

The employer was ordered to provide proof of the steps taken to obtain a civil judgment against the complainant within seven days of the determination. Failing this, the fund was ordered to pay the complainant his withdrawal benefit together with interest calculated at a rate of 15.5 percent a year from March 2007 to the date of payment.

CONTACT

The Acting Pension Funds Adjudicator is Dr Elmarie de la Rey.

Telephone: 087 942 2700

Fax: 087 942 2644

Post: PO Box 651826, Benmore, 2010

Email: enquiries-jhb@pfa.org.za

Website: www.pfa.org.za

The National Association of Independent Financial Advisers has not take kindly to the Financial Services Board insisting that all advisers should have a have proven minimum level of knowledge.

Last year a bunch of, to me, whinging and whining financial advisers formed a new representative body called the National Association of Independent Financial Advisers (Naifa) mainly because they did not take kindly to the Financial Services Board (FSB) insisting that all advisers should have a have proven minimum level of knowledge.

Among other things, the FSB wants all financial advisers to be able to prove they know the parameters of the Financial Advisory and Intermediary Services (FAIS) Act.

This Act of Parliament determines how you should be given financial advice and who is allowed to give you financial advice and sell you financial products. In effect, it lays down that only licensed financial advisers can do this.

The general code of conduct attached to the legislation states that advisers “must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry”.

This general provision is followed by a list of specific provisions, which include the fact that all representations made to you must be factually correct and must be adequate and appropriate.

It became increasingly clear to just about everyone within the seven years of the Act being promulgated in 2002 that many financial advisers had simply failed to read the Act and its regulations, and if they had done so, they either appeared not to understand the legislation or simply decided to ignore it.

The main proof of this came from the increasing number of determinations flowing from the office of the FAIS Ombud, in which repeated mention was made of the fact that financial advisers, against whom determinations were made, were not adhering to the requirements of the Act and its regulations (see illustration).

The reaction to the new qualification requirements from a group of financial advisers was a torrent of abuse directed at the FSB, mainly on the basis that the advisers did not have the time to study and they had been doing the job for so long they had no need to prove themselves.

My questions are, if everyone is so skilled, who has been selling and continues to sell the dud life assurance investment policies with high costs and confiscatory penalties; who has been selling the even more deplorable property syndications; and who sold “investments” in the Leaderguard scam, among other things?

Despite the noisy opposition of Naifa members and others, the FSB has stuck to its guns – as it should have – and is insisting that the examinations be written and passed.

Sandra Dunn, the chief executive of the Insurance Sector Education and Training Authority (Inseta), tells me that so far only about 44 000 of an anticipated 140 000 people have successfully written the first-level examination, Regulatory Exam One.

The rest have until the end of June to take a first stab at passing the exam, with the end of September as the deadline for any rewrite.

This, by the way, is a new, extended deadline. And then, depending on the level of advice provided and job function in the industry, there are further examinations with new deadlines for further periods ending on various dates this year.

Many financial services companies are running in-house training courses, education institutions are offering training and Inseta has set up a training course of its own.

The Inseta learning material is available on the Inseta and FSB websites and can be downloaded free of charge to anyone wanting to make use of it. Here are the website addresses in case you, as a consumer, want to know what your adviser should be doing for you: www.inseta.org.za and www.fsb.co.za

And to make it even easier for financial advisers, Inseta is also running seminars around the country.

The first people to sign up for the Inseta courses should be the leadership and members of the new Naifa. Some seem not to have a clue about the FAIS Act.

For example, last year I wrote a column saying how disgraceful it was that Santam’s professional indemnity underwriting agency, Stalker Hutchinson Admiral (SHA), on behalf of financial adviser Deeb Risk, had decided to challenge the right of the FAIS ombud to issue determinations on property syndication complaints.

There are about seven complaints and three determinations against Gauteng-based adviser Risk, who advised mainly pensioners to put their money into imploding Sharemax property syndications. Further determinations are on hold until the outcome of the legal application.

The massive mis-selling of imploding and often fraudulent property syndication schemes has left many thousands of pensioners facing penury. Risk, backed by SHA, wants to force the impoverished investors to fight their claims in expensive, lengthy High Court battles, negating the very purpose of the FAIS ombud, which is to provide a quick and cheap mechanism for the resolution of complaints.

Financial advisers are required to have professional indemnity insurance to cover themselves against claims from consumers.

The intention of the legislation requiring advisers to have professional indemnity insurance was to provide a back-up for consumers – not to pay legal fees for errant advisers to beat up consumers.

However, with the court challenge to the ombud, it seems the insurance is more directed at funding the beating up of consumers, who have a legitimate claim against financial advisers who have given appalling advice, particularly to the elderly.

Anyway, I received a response to the column from Chris van der Walt, a board member of Naifa, which is published below, with my response.

Van der Walt’s letter came with a covering email from the Naifa chief executive, Lance Friedlande, who claims that Risk “wishes to appeal in court against a discussion by the Ombudsman”. I think he means determination.

No Mr Friedlande, it is not the determination against which Risk is appealing; he is applying to the High Court, with the financial backing of SHA, to prevent the FAIS Ombud, Noluntu Bam, from issuing any determinations she wants on property syndications.

In terms of the FAIS Act (which I suggest Friedlande reads), if Risk was appealing the determination he would first have to apply to the ombud for permission to appeal, and then the appeal would go to the FSB Appeal Board, which is headed by a retired judge.

Apart from reading the FAIS Act and writing the examinations, I would also suggest that Naifa members read the Treating Customers Fairly documentation on the FSB website. This is a new regulatory regime that the National Treasury and the FSB are implementing, and it will place additional responsibilities on financial advisers to treat you properly.

This includes properly investigating products and not selling you lemons, driven almost entirely by how much commission is earned, as has been the case with most property syndications.

Next week is the National Budget, but I will return to this matter next month, dealing in more detail with the need for financial advisers to do proper due diligence checks before they sell products to you.

Letter from NAIFA to Personal Finance

I refer to the article, quite bereft of logical consistency, by Bruce Cameron in the November 26 (2011) issue of Personal Finance.

You will recall that the story discussed a consumer complaint lodged with the financial services ombud against a financial adviser over a R1.4-million investment in Sharemax. To qualify for the ombud’s jurisdiction, the complainant had to reduce the claim’s value to R800 000. The ombud ruled in favour of the complainant – a result that is now being challenged in court by the adviser and his insurers – a challenge against which Cameron strenuously objected.

Cameron argued that not only would the consumer suffer as a result of the case having gone to court, but that all consumers would find themselves in the same boat. Disingenuously, he extended this premise to include all consumers. All who dared be involved with the adviser – even indirectly – were thereby cast in an anti-consumer guise.

Cameron is surely aware that a determination by the ombud can be made in one (or combination) of three ways:

* normatively;

* substantively; or

* based on fairness.

The problem is, the introduction of fairness as a criterion embodies an element of subjectivity and uncertainty. There can be no fairness in the present case, where the complainant had to forgo a substantial R600 000 for the privilege of letting the ombud make a determination.

A case for redress to the courts is self-evident from these facts. Indeed, it would place the consumer in a far better potential situation. Consumers deserve less eclectic ideology and more legal certainty.

Advisers’ legitimate expectations are not currently being met by regulators. As long as their calls to scrap unjust provisions and the unjust application of rules continue to be ignored, the legitimate assertion of individual rights will grow. Regrettably, only thus will the powers-that-be sit up and listen.

Increasingly, informed consumers are appreciating the value of independent financial advisers, who are fully prepared to stand up for their clients’ rights. Independent financial advisers are deeply concerned that the continuous erosion of their rights and reputation will ultimately harm consumers.

Chris van der Walt

Board member of Naifa

Dear Mr van der Walt,

Firstly, let me quote the Financial Advisory and Intermediary Services (FAIS) Act, which you do not seem to have read or do not understand. It states: “The objective of the ombud is to consider and dispose of complaints in a procedurally fair, informal, economical and expeditious manner and by reference to what is equitable in all circumstances…”

As you stated and I stated in my original column, there is a R800 000 limit to the awards for compensation that may be made by the ombud. To claim a greater amount, the complainant would have to take the matter to the High Court.

Now Mr van der Walt, you try disingenuously to make out that the complainant, 72-year-old widowed pensioner Elise Barnes, is being deprived of her rights because she has taken her complaint to the ombud, forgoing R600 000 of R1.4-million potential claim. If she had gone to the High Court, she could have claimed the full R1.4 million, but pray, Mr van der Walt, you do not explain how Ms Barnes would fund the High Court action and what she will live off in the meantime.

You may judge the situation by how much money you have in your bank account, but Ms Barnes has been virtually cleaned out by the advice she received from adviser Deeb Risk to invest in Sharemax. She had no choice but to surrender part of her claim. She does not have enough money to maintain her retirement years, let alone fight High Court cases. But seeing you feel so strongly about her rights, why don’t you and your organisation fund her full claim against Risk in the High Court? Put your money where your mouth is.

You also do not deal with:

* How long it can take to get a matter finalised in the courts. Remember, Ms Barnes is 72 years old and this could wind its way over years all the way to the Constitutional Court.

* How the scales would also be massively against Ms Barnes, with Risk being financed by Santam and indirectly by its owner, Sanlam.

This claim of yours is as cynical and as uncaring as the famous misquote attributed to Marie Antoinette: “Let them eat cake.”

And the other thing you fail to mention is that there have also been determinations against Risk and there are other complaints in the wings that do not exceed the R800 000 limit. SHA is challenging the ombud’s right to make determinations in all these cases, and the column you criticise stated as much.

Yes, I agree that consumers need sound financial advice, but you do not seem to care a hoot about consumers, or about the thousands who have lost money in property syndications and other schemes because of appalling commission-driven advice.

What sums it up is your paragraph: “Advisers’ legitimate expectations are not currently being met by regulators. As long as their calls to scrap unjust provisions and the unjust application of rules continue to be ignored, the legitimate assertion of individual rights will grow.”

This does not seem to show any concern about consumer rights. It strikes me that all you are trying to do is abuse free publicity in Personal Finance to curry favour with the malcontents and unskilled in the industry to sign them up for membership of your organisation.

On the basis of your letter, if I was in the market for financial advice or products, I would be very cautious in dealing with members of your organisation.

Beware of financial advisers and companies that offer you guarantees. And always check that those offering guarantees are actually allowed to do so.

Beware of financial advisers and companies that offer you guarantees. And always check to see that those offering the guarantees are actually allowed to do so. This is the message from the latest two determinations from the Ombud for Financial Services Providers, Noluntu Bam.

The determinations arise from investments made in or through a collection of companies: Blue Platinum Ventures, trading as Blue Platinum Investments, Merlin’s Private Equity Fund and iBear Global Investment Strategies. None was licenced as a financial services provider.

The companies were controlled by Deolene Susan Catsicadellis of Melkbosstrand in the Western Cape and Reginald William Lynton Rabie of Wellington in the Western Cape.

The determinations arose from complaints by two investors, Mr ABB and Ms NH, who were told that their capital plus a minimum return was guaranteed.

In the case of Mr ABB, who invested R5 000, there was a minimum return guarantee of 10.66 percent every four months, with the potential of 15 to 20 percent, or even as much as 60 percent, over 12 months.

In the case of Ms NH, who invested various amounts but had R133 533 invested at the time of the companies’ failure in 2009, there were guarantees on capital as well as on above-market-related returns.

Bam says in her determination that none of corporate entities now exists but key individuals in the companies can be held responsible, even when not registered as key individuals in terms of the Financial Advisory and Intermediary Services (FAIS) Act. “Their contempt for the provisions of the Act and the illegality of their actions cannot allow them to escape the responsibilities that follow from attempting to assume such a position.”

Bam says the Act allows her to enforce a transaction even though the product providers had no authority to enter into the transactions.

She says the financial advisers who induced Mr ABB and Ms NH to invest, as well as Catsicadellis, had failed to meet the requirements of the FAIS Act Code of Conduct to act with due skill, care and diligence.

“Any reputable financial services provider worth his salt would have queried how the return could be both so lucrative and guaranteed.”

While Rabie did not provide advice, his name was on documentation as both a director and chief executive of the various companies. Bam found he did provide an intermediary service in terms of the FAIS Act.

She ordered Rabie and Catsicadellis to jointly and severally repay the investments to Mr ABB and Ms NH plus interest of 15.5 percent a year.

CONTACT

For problems with financial advice, call the FAIS Ombud, Noluntu Bam, on 012 470 9080, fax your complaint to 012 470 9097, or email info@faisombud.co.za. The ombud’s website is www.faisombud.co.za

Understand the pricing pattern your policy will follow so you can make a call on whether or not the policy will be affordable later on.

Life assurance companies use various methods to price your life risk policy premiums, and it is important to understand which pricing pattern your policy will follow so you can make a call on whether or not the policy will still be affordable later on.

The simplest product, and the one that offers you the greatest certainty of what you will pay, has a fixed level of cover for a fixed premium, Peter Dempsey, the deputy chief executive of the Association for Savings & Investment SA (Asisa), says. These level-premium policies are typically offered for a fixed term or for life.

The level of cover is effectively reduced each year by the rate of inflation. This cover is appropriate if you take it out to pay off debt that reduces each year, or to provide for dependants, such as children, who get closer to becoming independent each year.

Therefore, when you are younger, you will typically pay more for a level-premium policy than the cost of the risk you pose to the assurer. But once you are older, the cost to you will be lower than the cost of the risk you pose.

Alternatively, to make a life policy more affordable for you when you are young, it can be priced for your age, Dempsey says. Such a policy will, however, have premium increases.

A life policy priced for your age may in your younger years escalate at a low level, but the premium increases may become quite steep as you get older.

At some point, the premiums on an age-rated policy will overtake those on a level-premium policy.

Hybrid pricing patterns

To make premiums cheaper for you, but without the disadvantages that come with age-rated policies, life assurers have devised various hybrids of age-rated policies. The “Jargon buster” section of Asisa’s website (www.asisa.co.za) explains how these hybrid policies work.

* Compulsory increases. A policy may initially be priced somewhere between a level-premium and an age-rated policy, but the premium will increase by a predetermined amount each year.

The initial premium is higher than that of an age-rated policy, because some of the premium that will be required when you are older is paid in your younger years, while some of the premium increases that would typically be required on an age-rated policy are built into the compulsory increases.

You may be able to choose the level of the compulsory increase, Dempsey says, and the steeper the premium increase, the cheaper the initial premium will be.

On its website, Asisa illustrates how the different policies may initially be priced – see the table (link below).

* Variable age-rated increases. The premium increases rise as you get older, but the increases are not as steep as those you would experience if you took out a policy with an age-rated premium. Higher increases are applied in the earlier years of the policy and lower ones in the later years, compared with those on an age-rated policy.

Stepped increases

Another way in which life assurers can reduce the initial premium is to offer a premium that is reviewed or increased after a certain number of years. This is known as a stepped increase, and is where you are offered a premium guarantee for a set number of years.

You need to understand the terms under which the premium will increase at the end of the guarantee period, Dempsey says.

Assurers typically use one of the following stepped increases:

* Fixed stepped increases. The premium increases by a fixed percentage after a certain number of years. An example is a 20-percent increase after every 10 years.

* Age-rated stepped increases. The premium level is fixed for a period such as 10 or 15 years, and at the end of the term you can renew the policy without requiring a health check, so you are guaranteed that you will not be denied cover. However, at the end of the term, the premium is recalculated based on your age at that time. This can result in a steep increase in your premiums, especially if you are older.

There are some policies, Asisa says, that have both compulsory increases each year and stepped increases. Asisa notes that these policies are the most aggressive ones: they are very cheap initially, but they become very expensive in the long run.

Increases in cover

Most life companies also offer you the opportunity to increase the amount for which you are covered, so that your cover keeps pace with inflation. If you increase your cover, your premium will typically increase too.

* Fixed cover increases for a fixed premium increase. The amount for which your life is covered may increase by a set amount each year.

If you have an age-rated premium, a variable age-rated premium or a premium to which a compulsory increase is applied, your premiums will rise by more than your cover increases.

Asisa cites the following typical examples: a 10-percent premium increase each year may secure a seven-percent increase in cover; a five-percent premium increase, a 3.5-percent increase in cover; or cover grows at CPI, with premiums rising at CPI plus three percentage points.

* Fixed cover increase with a premium increase to be determined. Some policies offer a fixed annual increase in cover, but the premium increase is determined by the cost of cover at the time the increase is applied, and the cost of the cover takes into account your age. So the increase in cover will become more expensive each year as you get older.

* Growth in cover reduces. Some life assurers allow you to increase your cover each year, with the premium based on your age. To mitigate the rise in premiums, the growth in cover reduces each year.

A professional financial planner will explain to you how a life policy is priced and how the premiums will change in the future.

A good financial planner will explain to you how a life assurance policy is priced and how the premiums will change in the future, and will also help you to choose a premium pattern that will be most advantageous for you.

Jan-Carel Botha, an independent financial adviser at Ultima Financial Planners and a finalist in the Financial Planner of the Year competition for the past two years, says if you need assurance against death, he will present you with three or four policy options: usually one with a level premium, one where the premium is age-rated, and one with a compulsory annual premium increase of five or six percent.

Botha says he knows that if he then asks you to choose a policy, you will select the one with cheapest premium.

Therefore, before he asks his clients to choose, Botha takes some time to explain how the premium increases on the cheaper policies will eventually result in these premiums catching up to those on a policy that is more expensive initially, and how many years it will take to reach that point. This is often after seven or eight years.

In addition, Botha says, he will explain that if you choose a cheaper policy and constructively use the money you save – for example, by paying the difference between the lower and higher premiums into your home loan – you can increase your assets.

The aim of financial planning is to become financially independent and to accumulate sufficient savings and assets to be in a position to reduce your life assurance, or not to need it, he says.

Botha says he shows his clients where the breakeven point will be: the number of years it will take for the total cost of the policy with the lower premium and the benefit of the money saved on it to match the total cost of the level-premium policy. Often, this is some 14 or 15 years after the policy is taken out, he says.

Botha says he prefers an age-rated premium on life cover, because the savings in the early years of the policy can be put to good use. However, he is aware that the premiums escalate dangerously in later years, and not everyone can accept this.

He says taking the time to explain how a policy is priced, and the implications of that pricing, helps when clients are contacted by direct insurers or other brokers and offered policies with lower premiums. Then they are not tempted to switch simply because the initial premium is lower.

Individual circumstances also have to be taken into account when deciding on an appropriate premium pattern, Botha says.

For example, a client who will inherit a lot of money in a few years needs cover only for a short period, whereas a client whose family has a history of premature death may want to keep life cover in place for life.

When it comes to lifestyle benefits and the likes of Discovery’s Vitality programme and its impact on life policy premiums, Botha says he presents the premiums based on the best- and worst-case scenarios for clients’ health and Vitality status, and leaves them to make up their minds on their future health and Vitality status.

With the health integrator on Discovery Life’s policy, you can enjoy a premium reduction of about 50 percent initially, but could then face an increase of 24 percent annually, he says.

Ian Beere, an independent planner with Netto Financial Services and 2007 winner of the Financial Planner of the Year award, says given all the benefit and premium options, an adviser can present clients with endless alternatives. It is therefore important to use a sound framework when making recommendations.

Generally, life assurance is a grudge purchase, and clients either want to pay as little as possible or they cannot afford higher premiums, he says.

Therefore, Netto often recommends life policies with a compulsory annual premium increase of five percent a year, because the initial premiums are at a discount of 25 to 30 percent to those of a level-premium policy.

This results in an affordable premium that also reduces client’s vulnerability to being coerced into switching to a product which is cheaper now but more expensive in the long run, Beere says. He says clients who enter a level-premium contract need to clearly understand the fact that the product is more expensive now but more sustainable in the long term.

When it comes to dread disease cover, which has to stay in place for longer than life cover, Netto will often recommend a level-premium policy, he says. Planners at Netto are also also very wary of replacing old-style dread disease policies where claim criteria are easier than those in a replacement policy.

To weigh up the cost of one premium pattern relative to another, you have to cost the policy over the period for which you are likely to need it and then consider the present value of the cover, Beere says. You can have the best of both worlds by using two layers, Beere says, with some cover on a level-premium policy and some on a policy with a compulsory premium increase.

As you build up your retirement savings and your children grow up, the need for cover reduces. Beere says the policies are then structured so that you can cancel the compulsory-increase policy as it becomes expensive in later years.

What to read in the print edition of Personal Finance on Saturday, February 18, 2012.

You may think that the best life assurance policy for you is the one with the lowest premium. But today’s cheap premium may turn into tomorrow’s ever-increasing cost. Do you know how your life assurer will increase the premiums over the term of the policy? How will your premiums be re-priced once any premium guarantee period has expired? And what will happen if you want to extend the term of the contract? Personal Finance unpacks what you should know about how life policy premiums are priced, and advises what you should find out before you commit to a life assurance contract.

Also in our weekend print edition:

* Some financial advisers still trying to dodge consumer interests

* Important lessons for you in recent rulings by the Pension Funds Adjudicator

Personal Finance is published every Saturday in the Pretoria News Weekend, the Saturday Star, The Independent on Saturday and the Weekend Argus.

Financial services companies have a lot of work to do to meet the objectives of Treating Customers Fairly.

South Africa’s financial services companies may think they are treating you fairly, but research by the Financial Services Board (FSB) shows they are often way off the mark – even misunderstanding what it means to treat customers fairly and what it will take for them to deal with you properly.

Although most companies claim they are committed to treating you fairly, they often confuse fairness with customer satisfaction.

This is one of the conclusions reached by the FSB following a pilot project conducted as one of the first steps to implementing a new outcomes-based regulatory system for the financial services industry, Treating Customers Fairly (TCF).

Regulators around the world are moving towards regulatory systems that are based on principles, because the financial services industry is inclined to look for ways to get around regulatory systems that are based on specific rules, to the disadvantage of customers.

The 44-page analysis of the pilot project details many instances where the financial services industry will need to raise its game in order to demonstrate that it is treating you fairly.

But Leanne Jackson, the head of the TCF initiative at the FSB, says because TCF is still being rolled out and specific TCF-related legislation and regulations have not been developed, it is understandable that firms are still assessing the full impact of TCF and may not yet have detailed implementation plans in place.

The FSB is worried by the view expressed by a large number of the participants in the pilot project that their existing customer practices are largely aligned with TCF, and that the main impact of TCF will be to formalise their measurement and governance processes, Jackson says.

Although some companies have clearly made better progress than others, she says the FSB is concerned that companies may not yet fully appreciate the extent to which TCF may require new ways of thinking at all organisational levels, as well as real, practical changes in the way that their products, services and processes are designed.

The pilot project involved 20 financial services companies, which hold more than 200 different FSB licences. The companies voluntarily completed a comprehensive questionnaire designed to self-test their readiness to deliver the six outcomes of TCF (see “Project identifies where companies aren’t making the grade”, below).

Jackson says the FSB is pleased with the effort that the participating firms put into the exercise – “they clearly took the process seriously, providing detailed and considered feedback, and senior executives made themselves available for the in-depth follow-up interviews”.

Jackson says the study highlighted a number of issues. These include:

* The participants, virtually without exception, claimed that customer-centricity or customer value propositions are already an important part of their corporate values and strategies.

But almost all of the participants acknowledged that the self-assessment process highlighted that they still have work to do – in some cases, a lot of work – to embed TCF thinking consistently across their organisations.

* Company boards of directors, which the FSB considers to have a key role to play in creating a TCF culture, cannot yet be said to be providing specific leadership on customer treatment.

The FSB believes that for TCF to succeed, a culture of treating you fairly has to be created from the highest structures of financial services companies.

* The delivery of TCF outcomes is often inconsistent across the divisions of larger financial services groups, across different management levels, across different parts of the financial product life cycle, and even across product lines or distribution channels.

Jackson says the pilot project highlights that it is important for companies to have accurate management information systems (both quantitative and qualitative) in place, which will enable them to demonstrate and measure their success in achieving fair outcomes for their customers. Although most firms have many customer-related measures, the data are often not used effectively from the perspective of customer outcomes.

For example, measuring how many insurance claims are finalised within a targeted timeframe or how many queries a call centre agent handles a day does not necessarily provide a company’s leadership with insight into whether the claims or queries were handled fairly from the customer’s perspective.

* Many companies measure your level of satisfaction, rather than whether you receive fair treatment. These two concepts are not the same thing, Jackson says.

“A customer who does not complain has not necessarily been treated fairly, whereas a dissatisfied customer has not necessarily been treated unfairly.”

She says you may be impressed with effective sales and efficient administration – and hence express satisfaction – but if the product is mis-sold, fairness has not been achieved – and this is something of which you may become aware only in the future.

TCF will spread its wings more widely than current consumer protection legislation for the financial services industry, bringing the marketing of financial products, as well as the market conduct of banks, into the regulatory net.

Banks have so far managed to escape most of the market conduct legislation – the Financial Advisory and Intermediary Services Act does not apply to bank lending products.

Once TCF is in place, the wider financial services industry will have to demonstrate that it is behaving fairly when selling you a product or providing you with advice on a pro-duct, from the product development stage to dealing with your complaints and claims.

It is intended that TCF will be based on rules and principles, which will make it difficult for financial services companies to use armies of lawyers to find ways to get around the legislation.

PROJECT IDENTIFIES WHERE COMPANIES AREN’T MAKING THE GRADE

The Treating Customers Fairly (TCF) self-assessment pilot project conducted by the Financial Services Board (FSB) focused on how the 20 organisations that volunteered for the project measured up against the six standards (outcomes) that the government hopes to achieve by introducing TCF.

The project identified a wide range of practices that will not meet the required outcomes of TCF. The practices on which attention will be focused are broken down into the six desired outcomes of TCF:

1. TCF requirement: You must be confident that you are dealing with a company where the fair treatment of customers is central to its culture.

The problems and risks to outcome one identified in the self-assessment pilot project include:

* The lack of appreciation by boards of directors and senior management of the strategic implications of TCF for costs, rewards and profitability in product design;

* The absence of leadership to drive TCF in companies;

* The inability to assess or provide appropriate evidence of how a firm is meeting its TCF obligations, especially where responsibilities for the customer’s end-experience are shared by different entities;

* Conflicts of interest between a company’s commitment to TCF and its other goals are not adequately identified, analysed or managed; and

* Some companies are just waiting passively for the TCF legislation.

2. TCF requirement: Products and services marketed and sold in the retail market must be designed to meet the needs of identified customer groups and must be sold to the correct customers.

The problems and risks to outcome two include:

* Products are sold to customers for whom they are unsuitable and not intended. Little feedback is obtained directly from customers when products are designed.

* Distribution channels or strategies may be inappropriate for products or the targeted customers, because the choice of distribution channel is not always considered together with the product design.

* The bundling of products and/or services or the offering of excessive incentives to customers leads to inappropriate or unnecessary sales. This includes things such as loyalty programmes where one product is dependent on another, and it is difficult to disentangle the products when a customer wants to withdraw from one of them. Some firms simply assume that loyalty or add-on benefits are always good for customers.

* The risk profile of a customer group does not match that of the product – not enough is done to check affordability and understanding.

* The product provider does not understand or monitor the risks of the product.

* Products are launched without appropriate after-sales support and service structures being put in place.

3. TCF requirement: You are given clear information and are kept appropriately informed before, during and after you contract for a financial service or product.

The problems and risks to outcome three include:

* Promotions are not clear or mislead consumers, and customers do not understand the product information aimed at them. There is a strong focus on legal and technical issues when signing off marketing material, with little actual customer testing.

* Customers do not receive the key information they need to make an informed decision about a product at the right time, or the essential information is not appropriately highlighted.

* Inadequate after-sale information is provided about the performance of a product, its risks and what after-sale services are available; or the information on what action is required from a customer is inadequate.

4. TCF requirement: The advice you receive must be suitable and take account of your circumstances.

The problems and risks to outcome four include:

* Product suppliers often do not satisfy themselves that the intermediaries with whom they contract understand the products they sell and on which they give advice. Where independent brokers are used, many product suppliers believe they have no responsibility at all in this regard, and it is enough if the broker is licensed in terms of the Financial Advisory and Intermediary Services (FAIS) Act.

* Sales incentives and targets skew the quality of advice – advisers take more account of the commissions they will earn than the best interests of customers. Many firms simply say they comply with commission and FAIS Act regulations, and need not do more.

5. TCF requirement: You are provided with products that perform as companies have led you to expect, and the associated service is of an acceptable standard and what you were led to expect.

The problems and risks to outcome five include:

* Employees of financial services companies do not understand their obligations towards customers in relation to TCF. Some companies incorrectly believe that outcome five is relevant for investment products only. There is often little monitoring of functions, including customer treatment, outsourced to third parties.

* Monitoring of the impact of changes in the wider environment is done from a company perspective, not from the perspective of how they will affect the customer; or no action is taken to mitigate risks when such changes occur. The changes could be in things such as the tax environment, with the result that a product may not perform as expected. Product provider reaction is often limited to dealing with individual complaints.

* Customers are not informed of the costs or risks of a certain action or non-action on their part, which could impact on their expectations being met.

* Customers are not informed of the options that are available to meet changes in their requirements during a product’s life cycle.

6. TCF requirement: You do not face unreasonable after-sale barriers to changing a product, switching a provider, submitting a claim or making a complaint.

The problems and risks to outcome six include:

* Customers’ reasonable service expectations are not met, with most information being provided when the product is sold;

* Products are unreasonably inflexible; and

* The complaints-handling process is unwieldy or is isolated from other parts of the value chain. The insistence by some firms that complaints must be in writing is potentially unfair to unsophisticated customers.

‘NO NEED TO WAIT FOR THE REGULATIONS’

The Financial Services Board (FSB) has set 2014 as the target to complete the roll-out of the Treating Customers Fairly (TCF) regulatory regime.

But Leanne Jackson, the FSB’s head of the TCF initiative, says that, regardless of the scope or timing of future guidance about TCF, the FSB’s main expectation is that financial services companies should already demonstrate that they are delivering – or at least are making progress towards delivering – the six TCF outcomes.

“There is no reason, in the FSB’s view, for firms to delay taking steps towards ensuring their readiness to deliver these outcomes. The need to deliver these outcomes is in any event already implicit in a number of existing regulatory requirements,” she says.

The results of the FSB’s pilot project are being used to refine the TCF self-assessment tool, which will then be made available for general industry use.

Once the tool has been made generally available, the FSB will carry out a TCF “baseline” study, using a larger sample of companies, to benchmark the level of TCF delivery across the financial services industry.

A TCF regulatory framework steering committee, which has a number of work streams, is close to completing a detailed analysis of existing legislation, to identify gaps and inconsistencies in relation to the regulatory framework’s ability to deliver fair outcomes for customers.

This work will form part of the process of legislative changes proposed in the National Treasury’s “twin peaks” model for financial sector regulation, in terms of which the market conduct of most financial institutions will fall under one regulator. The implementation of TCF is a key component of the proposal.

An updated Code of Banking Practice spells out what you and banks must do to make changing accounts from one bank to another as painless as possible.

So you want to ditch your bank and switch to another, but you’re daunted by the prospect of switching and all that it entails?

The Banking Association of South Africa (Basa) has released an updated Code of Banking Practice, which covers switching a transaction account to another bank. It spells out your role and that of your old and new banks.

Basa is an industry body that represents all registered banks in South Africa. Its new code commits members to “making it as seamless and easy as possible for all personal transaction account customers to switch banks”.

The code relates only to transactional accounts, not deposits and loans, which are individual contracts. You may terminate deposits and loans according to the contractual terms, it says.

The code explains that since banks compete to attract new transaction account customers, you need to compare their products and services, fees and charges.

“A number of independent comparison calculators are available to assist you in this. We (your bank) will also assist you to calculate the costs for your specific transaction pattern via our website, call centre or branch services.”

Basa advises that you take the following into consideration before you start the process of switching:

* The rates and fees of your current bank versus another bank;

* Whether the location of branches and ATMs meets your needs; and

* The additional benefits on offer from both banks.

Depending on how you bank, the location of branches and ATMs may be of lesser or greater significance to you.

Once you’ve decided on a new bank, how do you go about switching? Basa says it can be done in three easy steps: open a new account, switch transactions, and close your old account.

1. Open a new account

The first step is to open an account with your new bank.

Give your new bank the appropriate information so that it can transfer debit orders, arrange new stop orders and, if relevant, load your payment beneficiaries.

Most of the banks will do all of this for you at no cost.

Sugendhree Reddy, the director of banking products at Standard Bank, says Standard Bank handles the switching of debit orders as a free service to new clients.

So does Absa, Arrie Rautenbach, the head of retail markets at Absa, says. The bank also notifies your employer of your new Absa account so that your salary is paid into it.

“Switching is a key service that we provide to new customers free of charge. Once a new customer applies for a transactional account, either online or in a branch, Absa’s dedicated switching team will facilitate the necessary changes for the customer,” Rautenbach says.

Andrew Bladon, the head of sales at the Core Banking Solutions division of First National Bank (FNB), says at FNB debit-order switching, salary switching and the loading of beneficiaries are done free of charge for new clients. To switch to FNB, all you do is give the bank your most recent bank statement, for it to identify your debit orders, and sign a one-page mandate, which gives FNB permission to act on your behalf when instructing your service providers about your new banking details, Bladon says.

Anton de Wet, the head of client engagement at Nedbank, says Nedbank ensures that the switching of debit orders and salaries is “seamless” and “hassle-free”.

Your new bank will also provide you with the following information:

* The terms and conditions that are applicable to your new account;

* Details of the fees, charges and interest rates that apply to your new account; and

* Contact information for further assistance in switching your account.

The Code of Banking Practice says: “When you give your new bank a signed debit order or salary redirect form, the bank may inform existing debit order originators of the new account details. You may have to confirm this with the originators.”

The code says that while the banks are committed to ensuring the process is smooth, it requires the co-operation of all parties involved – especially debit order originators and salary, income and benefit payers.

2. Switch transactions

Ask your old bank to provide you with the following information, which, in terms of the code, it must do within 10 business days of your notifying it that you are switching:

* Up to three months’ statements;

* A list of stop orders loaded on your account;

* A list of beneficiaries loaded on your account; and

* Any supplementary or linked cards or accounts that may be affected by the switch.

3. Close the old account

Instruct your old bank to close your account.

Basa says it’s advisable to keep the old account open for at least six weeks after you have switched, so that all transactions can be identified and switched. “Keep some funds in the old account to cover any transactions that are not switched in the six weeks.”

Rautenbach warns that while both accounts are open, you must budget for the cost of maintaining them. He suggests you load an overdraft facility in case payments continue to be deducted from your old account.

“If something goes wrong and an automatic payment bounces, you could be asked to pay a fee, either by your account provider or by whoever the payment was going to. The mistake may be someone else’s fault if, for example, the paperwork you provided was not processed (by the account provider) on time. If this is the case, complain. You may be able to get the fee waived,” he says.

Once you’ve switched, Basa advises that you keep an eye on your debit orders and other transactions to avoid unpaid debit orders and to ensure all transaction originators are using your new banking details.

And don’t forget those once-a-year debit or stop orders in your switching instructions to your new bank.

To download the updated Code of Banking Practice, go to www.banking.org.za. You’ll find it on the home page under “What’s new”.

COMPLEXITY HOLDS YOU CAPTIVE, SAYS BANKING OMBUDSMAN

Clive Pillay, the Ombudsman for Banking Services, says he is not surprised that his office hasn’t received complaints relating directly to switching accounts from one bank to another. Clients are hindered by “banking product and pricing complexity”, which makes it difficult for them to make comparisons, he says.

“Since 2004, the Falkena Report into competition in South African banking identified switching as a problem. The report found that consumers were deterred from switching accounts due to problems with information (insufficient) and costs,” Pillay says.

In 2008, the Enquiry Panel of the Competition Commission also found that the cost to customers of switching banks, including the cost of finding an alternative, created “a significant degree of customer captivity”, he says.

The panel recommended that the Banking Association of South Africa (Basa) develop a set of criteria for a switching code to be included in its Code of Banking Practice.

Late last year, Basa released a revised code of practice, including a switching code.

The switching code does make switching from one bank to another “relatively easy”, Pillay says. However, the problem, he says, is that the switching code in itself will not achieve the objective of facilitating the switching of accounts.

“The problem, in my opinion, lies in the fact that there is considerable product and pricing complexity in banking, coupled with information asymmetries (inequality of information).

“With regards to product and pricing complexity, banks appear to offer the same set of account-holding and transaction facilities, but these facilities are bundled, packaged and priced differently.

“The panel found that there is a need for simplified offerings that can be readily compared, both in price and content,” Pillay says.

The second problem, that of asymmetry of information, makes it difficult for consumers to understand, assess and compare the different offerings of the bank.

“It is only once a consumer understands the product and the pricing and has sufficient information at his or her disposal to be able to make a comparison, that he or she can then make an informed decision, and then switching becomes an option.”

Pillay says: “There is a need for banks to simplify their products, be more transparent with pricing and supplement this with sufficient information so as to enable a consumer to make a meaningful comparison between banks and ultimately an informed decision on switching.”

* You can contact the Ombudsman for Banking Services by telephoning 0860 800 900, faxing 011 483 3212 or emailing info@obssa.co.za

BE SURE TO SWITCH FOR THE RIGHT REASONS

To lure new clients into opening a transaction account, some banks are offering enticing extras – from discounted tablet computers and smartphones to free subscriptions to online, cellphone and telephone banking.

Some of these offers are on condition that your salary is paid into a new cheque account and that you switch your debit orders to the new account.

Excellent as these offers may be, make sure your decision to switch banks is carefully considered and based on sound reasons.

FNB is offering smartphones and tablets at reduced rates to new clients who open a cheque account with the bank. (The offer is also open to existing FNB account holders.) The beauty of FNB’s offer is that you not only stand to score a discount of up to 30 percent on a smartphone or tablet, but you also get to pay it off over 24 months interest-free.

Andrew Bladon, the head of sales at FNB’s Core Banking Solutions division, says the demand for the offer has far exceeded expectations.

Bladon says that since the offer was launched (in October last year), FNB has seen “significant month-on-month growth in new account sales volumes”.

He says the offer is aimed at giving clients access to “aspirational innovative technologies” at less than what the devices cost at retail outlets.

FNB’s offer should also be seen in light of its active promotion of day-to-day banking via electronic banking channels, such as the FNB Banking App, internet and mobile banking, as well as paying for goods with your card rather than cash.

“Our proposition is that a customer will never have to visit our branches unless they choose to,” Bladon says.

Absa offers new clients who open a transactional package the following:

* Free subscriptions to online, cellphone and telephone banking;

* An unlimited number of debit and stop orders;

* Overdraft facilities;

* A free garage card with no debit transaction fees;

* Free SMS notification; and

* A bundled offering, including the option to switch your home loan to Absa.

Arrie Rautenbach, the head of retail markets at Absa, says some banks throw in freebies such as free travel insurance. He says some of these come with a catch and advises you read the small print before signing up.

CAPITEC’s NEW CLIENTS ‘ARE FROM OTHER BANKS’

Capitec Bank, which is reportedly signing up 100 000 new clients a month, says most of its new clients are switching from other banks, as opposed to being previously unbanked clients.

Capitec offers just one account: a savings and transaction account in one.

Carl Fischer, the head of marketing and corporate affairs at Capitec, says during the 11-year-old bank’s “establishment phase” clients were predominantly previously unbanked. But since 2009, most of Capitec’s clients have come from other banks.

Fischer says that although the bank does not record the reasons clients switch to Capitec, feedback and research suggests that the simplicity of the bank’s offering compared with the complexity of their competitors’ offerings is the main reason clients are switching.

Capitec promotes its “simplified services and pricing structure”. The bank charges a fixed withdrawal fee of R3.75 (or R7 at other banks’ ATMs) instead of charging fees on a sliding scale. The penalty fee on unpaid debit orders is R3.75, versus R90 on most accounts at Nedbank, for example.

Arrie Rautenbach, the head of retail markets at Absa, says Absa has identified the key reasons for switching. He says transparency, language, customer needs, fees, skills, and bundled offers all play a part in a client’s decision to switch.

“If information on products and fees is not presented in a user-friendly way, it’s misinterpreted. Many South Africans don’t have English as a first language and have difficulty making sense of brochures or understanding the terms and conditions of a product. Bank employees are not always au fait with bank products and cannot advise clients with regard to the best banking options.”

Sugendhree Reddy, the director of banking products at Standard Bank, says clients often switch because they perceive they can get a better price elsewhere.

“Standard Bank encourages customers to take an interest in their bank charges and understand why they pay the fees they do.”

None of the big four banks – Absa, First National Bank, Nedbank and Standard Bank – would disclose the number of transaction accounts that they have lost over the past year. They say they are growing their new business, and new clients include those from other banks.

The revision of regulation 28 of the Pension Funds Act is no reason not to use a tax-incentivised savings vehicle to put aside money for your retirement.

Be warned: the revision of the prudential regulation, which sets limits on how much you may invest in any asset class, is no reason not to use a tax-incentivised savings vehicle, such as a retirement annuity (RA) fund, to put aside money for your retirement.

Since the revised regulation 28 of the Pension Funds Act came into operation last year, there has been a lot of unjustified criticism of it, in my view.

This has been capped by absolutely unacceptable instances where some have advised against using tax-incentivised retirement savings vehicles.

Most of the adverse criticism has been based on two issues:

* The revision of the different asset classes and their limits; and

* The fact that the regulation now also makes it obligatory for the limits to be set at a member level rather than at a fund level.

The requirement that asset limits be set at member level does not affect most members of occupational retirement funds, because this happens automatically, particularly where there is limited investment choice.

But it definitely does affect most members of retirement products provided by the financial services industry, such as RAs, preservation funds and those occupational funds (mainly umbrella funds) where there is wide investment choice.

In the past, the total assets in the fund had to be invested within the limits set by regulation 28. The main restriction was and remains a 75-percent limit on investments in equities.

Regulation 28 does not mean that you must be 25-percent invested in cash, which much of the time provides below-inflation returns. In fact, you can still be 100-percent invested in equities because you can invest 75 percent in equities and a further 25 percent in listed property.

The National Treasury made the changes to regulation 28 because of concerns about it being set at fund level. It was concerned for two reasons, namely:

* It meant that the retirement savings of individuals were not being invested prudently, exposing fund members to unacceptable investment risk; and

* Some individuals had an advantage at the expense of others. For example, over the years, many RA funds closed their foreign investment options because the limits on foreign investments had been reached. This meant that some people had 100-percent foreign exposure and others had none.

However, this must have been a bit of a relief for those who had no or little exposure to foreign markets, because over the past 10 years local equity markets far out-performed foreign opportunities, many of which provided a loss for investors – proving the need for regulation 28.

However, there is no doubt that problems have arisen as a result of the member-level requirement. You have to constantly rebalance the assets within your fund if you have individual choice and have decided to structure the underlying asset classes yourself.

This becomes even more complex if you are making regular monthly contributions, because you will have to decide on and adjust the allocations to the different asset classes as you reach the limit in any one sector or sub-sector.

The far easier option is to look for a collective investment scheme that will do the job for you, leaving the asset allocation to an experienced fund manager who will not only keep you within the limits of regulation 28, but will also, hopefully, get the allocation right, from an investment balance point of view.

The joy of collective investment schemes (unit trusts) is that they offer what are called asset allocation, or balanced or managed funds, which invest across the asset classes; and within this sector of funds are those which meet the requirements of regulation 28 – namely, domestic asset allocation prudential funds. Those that do not meet the prudential requirements are known as flexible funds.

The asset allocation prudential funds come in four guises:

* High equity funds, which have an equity exposure of above 65 percent but not more than 75 percent of a fund’s assets;

* Medium equity funds, which restrict equity exposure to between 40 and 65 percent;

* Low equity funds, where the equity investment is limited to a maximum of 40 percent; and

* Variable equity funds, which can invest from zero to 75 percent in equities.

The returns of the funds can vary substantially. Currently, the top performers in each of the four categories out-perform the bottom performers of all categories.

However, if you compare the top performers with each other over three years to the end of December 2011, you find that the best performance comes from the variable equity fund followed by the high-equity fund and the lowest comes from the low equity fund (see performance data, below).

So the question must be: why choose a low equity fund? Well, the main reason there are high, medium and low equity categories of prudential funds is because of what is called life staging.

Equities have historically provided the best returns, but this is on average annual performance. Their actual performance is highly volatile. For example, the FTSE/JSE All Share index is currently about double where it was when equity values were hammered in 2008.

Imagine retiring and buying a guaranteed pension then as opposed to now. Your pension would have been about half as well.

So the main objective of the different categories is to smooth out this volatility risk, particularly when you approach retirement.

When you are younger you would use the high equity funds, and you would be in low equity funds in the few years before you retire. This is known as lifestage investing.

With variable equity funds you are leaving the decision on downside protection to the asset manager.

The other main reason for investing across asset classes as required by regulation 28 is because asset class and sub-asset class performance often does not correlate. So while one asset is performing well, another could be in the doldrums.

The problem is that very few people can predict on a consistent basis which asset will perform well, when and for how long.

MINISTER’S SPECIAL OFFER ON GROWING YOUR NEST EGG

If you haven’t made sufficient provision for your retirement, you have an opportunity to improve things. You have two weeks left in this tax year in which to take advantage of Finance Minister Pravin Gordhan’s annual tax break, which will help you to fill up your retirement coffers at a big discount.

Gordhan’s offer to reduce your tax liability for 2011/12 expires at the end of the tax year on Wednesday, February 29. The annual offer is on a use-it-or-lose-it basis.

If you are on the top marginal income tax rate of 40 percent and you contribute 15 percent of your non-retirement-funding income to a retirement annuity (RA), you can claim your contribution as a deduction from taxable income. In effect, Gordhan adds 40 percent to the amount you contribute to your retirement savings!

If you are on a 30-percent marginal rate, you get an effective 30 cents in the rand.

The reason is that you will not be paying tax on the rands that you contribute to retirement savings.

If you want to reduce your tax liability for the year, you will have to do your sums this weekend to give yourself and a product provider sufficient time to top up your retirement savings before the deadline. Until three years ago this tax break was limited to people under the age of 70. Now it applies to everyone.

The tax laws allow you to deduct limited amounts from your taxable income to fund your retirement (see “Fund choices for savers”, below).

The tax breaks do not end with claiming a deduction against your retirement-funding income. Retirement savings are packed with other tax breaks, including:

* Investment growth on deferred tax. By investing in a retirement savings vehicle, you are effectively deferring the payment of tax until you retire. The money you do not pay in tax earns returns until you withdraw it as a pension and/or a lump sum.

* At retirement, the first R315 000 of any lump sum you take from a retirement fund benefit is tax-free. The next R315 000 is taxed at 18 percent, the next R315 000 at 27 percent, and any further amount is taxed at 36 percent. These amounts are cumulative and cannot be claimed more than once.

* The amount used to buy a pension is taxed only when you receive your pension payments. Many people are taxed at a lower rate once they reach 65, when the effective tax rate is lower because of the pensioners’ secondary rebate. This means you pay less tax on the same rand than you would have paid when you earned it.

* The underlying investments in tax-incentivised retirement vehicles are not subject to capital gains tax (CGT) or to tax on foreign dividends and net interest earnings. This is an advantage over other savings products, which are subject to both income tax and CGT, either in your hands or in the hands of your product manager.

* When you die, your savings in a tax-incentivised retirement vehicle can be paid directly to your dependants or beneficiaries either as a lump sum or as an annuity (regular income stream).

Note: It is important to name your dependants or beneficiaries to assist your retirement fund trustees in the distribution of your accumulated benefits if you die before retirement. After retirement, where there is a capital residue, you decide, without interference, who gets the money on your death.

HEALTH WARNING: Finance Minister Pravin Gordhan’s generous offer is not likely to be around forever. The government’s proposals to reform the retirement-funding system include placing a limit on the amount you may claim as a tax deduction, particularly because the government intends to make it compulsory for you to save for retirement.

But in the meantime, all of us, including the very rich, can get the taxman to subsidise our retirement savings.

Top-performing domestic asset allocation prudential funds at December 31, 2011

High equity fund: Momentum Accumulator Fund of Funds

The fund provided a three-year average annual return of 14.5 percent. It is about to undergo a name and mandate change arising from the Momentum and Metropolitan merger. The fund is made up of a number of funds divided by asset class, namely:

* Six domestic equity funds totalling 49.96 percent of assets;

* Four fixed interest funds totalling 14.86 percent;

* One property fund – 9.83 percent;

* One global equity feeder fund – 24.78 percent; and

* Cash – 0.46 percent.

Medium equity fund: FG Saturn Flexible Fund of Funds

The fund provided a three-year average annual return of 13.7 percent. The fund’s main holdings are:

* Investec Opportunity Fund, an asset allocation flexible fund – 30.6 percent of the portfolio;

* Sanlam Balanced Fund, an asset allocation prudential medium equity flexible fund – 30.8 percent;

* Coronation Market Plus Fund, an asset allocation flexible fund – 31.6 percent; and

* Cash – seven percent.

Underlying asset allocation:

* Equities – 46.3 percent;

* Foreign – 18.10 percent (asset allocation not provided);

* Cash – 19 percent;

* Bonds – 14.4 percent; and

* Property – 2.2 percent.

Low equity fund: Coronation Balanced Defensive Fund

The fund provided a three-year average annual return of 12 percent. The main holdings are:

* Coronation Global Opportunities Equity Fund – 11.1 percent of the portfolio;

* Coronation Global Emerging Markets Fund – five percent;

* MTN Group – one percent;

Underlying asset allocation:

* Domestic assets – 79.1 percent, made up of:

Equities – 9.6 percent;

Preference shares and other securities – two percent;

Real estate – 4.4 percent;

Bonds – 45.9 percent; and

Cash – 17.1 percent.

* Foreign assets – 20.9 percent, made up of:

Equities – 16.3 percent;

Real estate – 0.8 percent;

Bonds – 3.8 percent

Variable equity fund: Cadiz Managed Flexible Fund

The fund provided a three-year average annual return of 15.04 percent. The main holdings are a collection of individual securities, with 66.35 percent in equities, 16.98 percent in cash, 10.94 percent in fixed interest, 5.32 percent in property and 0.41 percent in preference shares.

Source: Fund fact sheets