The PPS Retirement Annuity (RA) Fund has decided to close its life assurance RA to new business and in future offer members only its unit trust RA – a move that could threaten the future of traditional life assurance investments, including RA products.
The move by the fund’s trustees will put pressure on the rest of the life assurance industry, which continues aggressively to market its inflexible, high-cost RA products despite thousands of investors, over many years, losing billions of rands as a result of poor performance and the confiscatory penalties levied when members were unable to pay their contributions.
The confiscatory penalties also put life assurance RA members between a rock and a hard place, because switching RAs would result in the penalties dramatically reducing their savings.
The PPS RA Fund currently offers its members two underlying investment options:
* A life assurance investment option underwritten and extensively sold by Sanlam, in which about 118 000 PPS RA Fund members have about R24 billion invested. This option will stay open for current members until all existing investments mature. Members who make monthly contributions will be able to continue to do so.
* A unit trust option, called PPS Investments RA, offered in conjunction with Coronation Fund Managers. The PPS Investments RA is a lower-cost, versatile product that allows members to increase, decrease or stop paying their contributions without incurring a penalty.
The trustees of the PPS RA Fund are telling members that its unit trust option is the better of the two.
Thinus Ferreira, principal officer of the PPS RA Fund, says one of the biggest drawbacks of life assurance RAs is that they have complicated fee structures, which include some fees being charged upfront. “In contrast, new generation unit trust-based products charge far lower fees and do so as and when investment contributions are made – not upfront. Over time, that has the potential to make a significant difference to the total,” he says.
The announcement by PPS yesterday that the traditional option has been closed follows increasing member dissatisfaction with costs and the confiscatory penalties that have been levied when members have been unable to maintain their contributions or have wanted to switch to a lower-cost and more flexible new generation product.
The extraordinary move anticipates the introduction of the Treating Customers Fairly (TCF) regulatory regime. An increasing number of trustees of financial services industry-sponsored retirement funds are concerned that traditional life assurance investment products will not pass muster once TCF is implemented.
BEFORE YOU SIGN ON THE DOTTED LINE
The things you should consider before you buy or switch a retirement annuity (RA) are:
* Costs. You must be told of all the costs in a way that you can understand them. The best way is to be told the reduction in yield (RiY), which is the percentage by which your returns will be reduced by costs annually. You must be provided with the RiY as a percentage and in rands over a fixed period, particularly to age 55 (the youngest age at which you can mature an RA). The RiY must be in writing and include all costs.
* Contractual terms. All the terms of the contract must be detailed, and you must be told of any penalties that may be imposed. These penalties may be triggered by things such as your being forced to reduce or stop your contributions because of a change in your financial situation, such as losing your job. Unless you are certain of what the future holds, it is better to choose an RA that does not have conditions that can result in penalties. Most contractual products are sold by life company agents.
* Underlying investment choice. Do you want or even need investment choice? The more choice you have, the more a product will cost. Most of us should be happy with a balanced portfolio that meets the prudential investment requirements of regulation 28 of the Pension Funds Act. Regulation 28 ensures that a fund is diversified properly across and within asset classes to reduce investment risk.
* Advice. Many people need advice, but advice should not be limited to which product to choose. Few advisers have the know-all to provide investment advice. The complex products that require investment advice should only be considered by the wealthy, who can afford to pay for the type of advice required to get it right. And remember that you are entitled to negotiate advice fees and commissions.
YOUR RA CHOICES
Retirement annuities (RAs) come in various guises, offering different cost and legal structures, and premium levels. Often, you are not informed of all the available choices and their consequences.
Your main choices are:
* Life assurance RAs. These are normally contractual and have penalties if you reduce or stop paying your contributions.
Life assurance RAs are often sold with long-term contracts, or at least until you turn 55, to maximise the commissions.
The commissions are based on the premium multiplied by the term, with 50 percent of the amount paid upfront and the balance as and when you pay your contributions.
* Unit trust RAs. The simplest and most cost-effective option is a unit trust RA issued by a collective investment scheme that restricts the underlying investments to the company’s suite of unit trust funds.
Unit trust RAs are entirely flexible, allowing you to make lump sum or recurring (debit order) contributions and to stop, or increase or decrease your contributions (subject to the minimum investment amounts).
You are normally allowed to switch between the unit trust funds of the same management company free of charge. The choice of underlying unit trust funds is yours to make.
Most management companies offer prudential asset allocation funds, which reduce your investment decisions. These funds come with different levels of risk, mainly reducing volatility risk by having a higher allocation to fixed interest investments, but this also reduces your potential to benefit from equity market upswings.
* Linked-investment services provider (Lisp) administration company RAs. Lisp RAs offer you a wide range of products as the underlying investments and the ability to switch between the products of numerous asset management companies.
Most of the product choices are collective investments (unit trust funds and exchange traded funds). However, you may be able to hold a portfolio of shares and even life assurance products that offer guarantees on both your capital and any investment growth.
In the case of a guaranteed product, there may be contractual conditions that commit you to paying a recurring premium for a predetermined period, normally a minimum of five years.
Lisp products may be sold under the umbrella of a life assurance RA with all the resulting costs and contractual conditions, while offering you the choice of underlying investments typical of a pure Lisp product.