Do you know of any strange doings in your retirement fund?

Published Feb 12, 1997

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It is becoming increasingly important for members of retirement funds to call their trustees to account and to demand details of such things as investment strategies.

There are some strange things going on out there that members need to know about.

Remember, as a retirement fund member it is your money and you should be aware that great profits can be made from the investment of that money.

Here is one of the strange things that is happening.

Consulting actuaries Alexander Forbes do a lot of work and earn a lot of money giving advice to retirement funds and their trustees about how and where billions of rands should be invested.

But the company does not seem to be satisfied with what it is earning in giving advice. It appears to have developed a new source of revenue which, on the face of it, would not be in the interest of the members, particularly those with lower incomes.

It works like this: Alexander Forbes has been buying endowment policies on behalf of fund members using retirement fund money.

In a faxed reply to queries from Personal Finance, joint managing director Leon Lewis claims "these policies provide a cost effective and tax effective investment vehicle for a member on withdrawal and/or retirement.

"The justification for the product is the tax and cost effectiveness of the product in relation to other alternatives for a member's retirement assets".

Come now Mr Lewis, if this is the trite type of explanation you are dishing up to trustees it is unacceptable.

Let us have a look at this again.

Firstly, let's deal with this being a cost effective vehicle. Let us take someone who withdraws from a retirement fund.

If we assume that a policy is taken in the name of a fund member and that member changes jobs and leaves the fund before retirement, the member could incur significant losses on surrendering the policy..

This is because of the costs, including significant commission, of issuing the policy and because life offices do not pay out the real value of a policy.

Let's however be charitable to you Mr Lewis and say the money has gone in a shorter term endowment with a minimum maturity period of five years. The member would not be as vulnerable but could still lose.

Now let's move on to the product being tax effective.

As you should know Mr Lewis, the life assurance companies are also tax collectors. They collect tax for the government at a fixed rate on the income growth of endowment policies at a rate of 30 percent.

This is great if a policyholder has an average rate of taxation greater than 30 percent but anything below that means you have placed the policyholder at a disadvantage.

You did not argue, but you could have, that on a matured policy a pensioner can receive tax-free payments by making partial surrenders equal to the annual capital and income growth on the investment.

This is a sound argument but only if the person is receiving a taxable income.

If a pensioner falls below the tax threshold then this no longer applies.

By fudging your answers on whether you receive any payment for issuing these policies makes me suspect you do - whether it is an annual fee or an upfront commission.

This raises the final issue. Surely it is a conflict of interest to be advising retirement trustees on investments and selling them products at the same time?

To me it is, but I may be a little old fashioned so I sought another opinion from Andri Swanepoel, the deputy executive officer of the Financial Services Board.

This is what he had to say.

"The practice of being an investment manager (for a fee) and also introducing investments on which commission and/or a fee is payable to himself is in principle undesirable.

"I believe that it is the duty of the board of management to assure itself that the intermediary (manager) acts on an arm's length basis.

"I believe this is an aspect which needs to be discussed under the code of conduct arrangements when the proposed regulation of retail investment services legislation (intermediary legislation) comes into place."

Swanepoel says the sale of endowment policies to funds which are then ceded to members at retirement are presently under discussion with the life industry.

If you, Mr Lewis, are prepared to put forward a more reasoned and cogent argument to, firstly, support retirement fund members being given endowment policies, and secondly, why this is not a conflict of interest I will happily publish it.

Until such explanation arrives I would suggest to retirement fund members that they check with their trustees whether such policies are being issued in their names or will be transferred to them, and demand a proper explanation.

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