PENSION fund adjudicator Vuyani Ngalwana has called for a halt to life assurers acting as "de-facto" banks, asking Finance Minister Trevor Manuel to probe the "industry practice" of insurers deducting commission from retirement annuities and hidden "interest" on that commission.
This "new twist" to the adjudicator's tussle with life companies sees Ngalwana uncover another apparently poorly disclosed "industry practice" that prejudices consumers.
Yesterday's ruling could provoke a backlash against assurers, when consumers discover that the life companies have effectively charged them above-inflation interest on loans they never knew they had.
If Ngalwana is correct, this ruling may have other implications for life insurers, and could mean that at the least insurers would have to comply with heavy provisions under the new National Credit Bill.
In the case ruled on yesterday -- which deputy adjudicator Naleen Jeram said was "one of the most important rulings we've ever made" -- construction company owner Brent Walters contributed R24000 to an annuity fund from 2002.
When Walters stopped contributing in September last year, Momentum deducted 87% of this in costs, leaving him with what he said was "a pathetic amount of R3166".
But Ngalwana said part of these costs taken were for "upfront" commissions of R8460 payable to the broker who sold Walters the policy -- and for interest charged at 12% on that amount.
Brokers' commissions are currently paid upfront by the insurance companies, and the companies recover them from the consumers over the first two years of their contributions.
But Ngalwana said this meant the insurers were in effect lending money to the consumers to pay these commissions, with details of the loans -- including the interest rate -- unknown to the people taking out the policies.
Life Offices Association deputy chairman Mike Jackson said this practice of recovering commissions and "interest" from consumers was "only a construct", and "doesn't mean the life assurers are acting as banks".
"In the past, the life industry all over the world has acted in this way, where commission is paid upfront and recovered over the course of the product," he said.
Jackson said the problem lay in the way which commission was paid upfront to a broker, and his organisation recently proposed a new commission model that would see brokers being paid "as-and-when" premiums were paid by consumers.
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