Sanlam's announcement last week that it is dramatically reducing the confiscatory penalties which it applies when you do not maintain premiums on both retirement annuities and endowment policies is good news.
It means that Sanlam has become the first life assurance company that has accepted that its shareholders must also be at risk in doing business with you.
Until now, the life assurance industry has operated like no other business anywhere can, namely it takes absolutely no business risk. Every other business has to put shareholder money at risk in providing products and services. What the life assurance industry has done is transfer all risk onto us as policyholders.
It has done this by making you sign up to a contract to save your money. If you cannot maintain the contracted savings, the life assurance companies claim all their costs, including future costs not yet incurred and even, in some cases, future profits, by confiscating all or a sizeable proportion of your accumulated savings. In other words, they take no risk whatsoever. This is overlaid by:
- The life companies not disclosing in a way that is clear to you all the costs you will be charged.
- The creation of perverse structures which the life companies use to incentivise their sales forces, namely upfront commissions and paying for luxury foreign trips.
- Their continual side-stepping of the law to put you the policyholder at a disadvantage.
So the Sanlam announcement that it will significantly reduce, but not altogether scrap, the penalties that it has applied in the past to all new policies it sells, is good news.
But this is not the end of the story. I still want the life assurance industry to explain to me why people have to be locked into long-term contracts to save their own money and are penalised if they do not keep saving?
It is not as if we are purchasing a service or a product. We are merely saving our own money. We are paying life assurance companies to invest the money on our behalf. Their profits should come from doing for us.
Unit trust companies do not penalise us if we reduce monthly payments. Exchange traded funds such as the Satrix index tracking funds do not do this. So why should the life industry?
This question becomes even more relevant when you consider that the fees life companies charge for managing our money are a lot higher than those charged by most unit trust companies and significantly higher than exchange traded funds.
The big problem that Sanlam and the rest of the industry still has to address is the upfront commission structure that the industry uses to pay its product floggers.
What really surprised me was the reaction of one of the product flogger organisations, the Life Underwriters Association of South Africa (Luasa), which claimed this week that the Sanlam announcement was a vindication of its stand in opposing a proposed partial move away from upfront commissions.
As I have said repeatedly, as long as the life assurers continue to pay upfront commissions on long-term savings plans there will be surrender penalties and massive mis-selling by the product floggers will continue. To state the position clearly:
- Upfront commissions account for between 30 and 40 percent of the costs that make up the confiscatory penalties levied by the life assurance companies when you do not maintain your premiums. With Sanlam's new penalty structure you can still lose 25 percent of your saving should you fail to maintain your premiums.
- Upfront commissions are one of the major driving forces for mis-selling because after two years there is no sanction for a product flogger who advises you to cancel an existing policy (which will result in you incurring a surrender penalty). This is known in the industry as churning.
If this is the case, I must ask Luasa and the other product-flogger organisations which claim they are opposed to churning: Who is responsible for the billions of rands policyholders lose every year because of churning?
They should provide me with a list for publication of advisers they have thrown out of their organisations for churning. I predict that no such list will be forthcoming.
- Upfront commissions mean that there is no incentive for financial advisers to keep advising you on on-going issues, such as whether premium-escalation clauses attached to many policies are still appropriate.
The product flogger gets commission on the escalations with no obligation to give you advice. The upfront commissions only encourage the product floggers to contact you in order to get you to churn your investments.
Sorry, Luasa, the fact that Sanlam is maintaining the current upfront commission payment structures is no vindication of your opposition to upfront commissions.
Upfront commissions will have to go for a number of reasons. The two most important reasons are:
- The Financial Advisory and Intermediary Services (FAIS) Act, which came into force in September last year, requires financial advisers and product floggers to provide you with appropriate advice. I am sure that the Ombud for FAIS, Charles Pillai, will soon receive many complaints from policyholders hit by confiscatory penalties on the basis of inappropriate advice because, unlike life assurance products, collective investments have lower costs and no surrender penalties.
Unfortunately he can only hear complaints on policies bought after October 1 last year.
I suspect that any product flogger will find it difficult to convince Pillai that he or she was acting in the best interests of a policyholder.
- Consumer Resistance. With the publicity being given to the high costs of life assurance products consumer resistance is starting to set in. The life assurance companies will be forced to come up with proper savings products which do not penalise policyholders.
Finally, while Sanlam's move deserves praise, and sets a good example for the industry, it must be noted that the new structure only applies to new retirement annuity and endowment policies issued from July 29 this year.
It does not deal with all those many policies on which billions of rands have been confiscated from policyholders.