News Article : Pay what’s due
|Category:|| Legal Affairs : Legal Opinion|
|Author:||Edited by ITInews|
|Posted:||23 Jan 2006|
Adjudicator criticises high costs
What happens when your retirement fund gives a projected value when we join, but that to our horror upon retirement we find the value is half what we expected?
Dave Vinnicombe, a director at the Durban law firm Garlicke & Bousfield Inc says this is exactly what happened in a recent case, De Beer v Central Retirement Annuity Fund.
Upon retirement, most of us will be entirely dependent on our annuity funding, so getting what’s due is critical.
“When he joined the fund, the complainant was given a projection of what he could expect on retirement - R24 883 per annum or R2 073 per month. On retirement after 15 years membership, he was advised he would be paid R892.13 per month - 57% less than he expected.”
The difference was due to the costs of the Fund and allowances or assumptions made regarding inflation. This dispute was referred to the Pension Fund Adjudicator for determination.
The Adjudicator expressed these opening remarks: “The facts of this case demonstrate a truly disturbing practice in the South African retirement industry, especially if regard is had to a widely held view that less than 10% of South Africans of vocational age have wholly adequate retirement provision.”
It would seem that those who try to make adequate provision for their retirement through annuity funds are mulcted in costs that erode the very nest egg such funds are supposed to preserve and grow for their members. What is of even greater concern, says Mr Vinnicombe, is that these costs are generally not disclosed to members at the time of signing up, nor are they disclosed with some degree of precision in the schedule or terms and conditions document that usually follows a member’s signing up.
In November 2004 the Minister of Finance publicly lamented what he called “horrendous fees taken by institutions from people who find that they have less than they paid into (retirement annuity) funds.”
Comments Mr Vinnicombe, “This criticism notwithstanding, these unexplained undisclosed costs appear to continue unabated. In my view, regulation in this regard has now become necessary if the Minister’s concern is to be addressed effectively and, more importantly, if South African members of these retirement annuity funds are to be assured that what they see in the policy document is what they get on retirement.”
In looking more closely at the Fund’s assessment of the inflation rate, it did not take into account over a longer than 10-year period that the inflation rate had declined remarkably. The Adjudicator was critical of this lack of vigilance by the Fund and commented in the following terms:
“Given the downward trend of the inflation rate since the inception of the Complainant’s membership, it is confounding why the inflation presumption was not revisited even 10 years into the Complainant’s membership.”
The Adjudicator then examined the performance of the Fund during the period and found that overall it had performed very well. He further commented along these lines:
“Having regard to this performance, it is not clear how this could possibly be reason for a 57 % reduction in the promised pension amount and thus cannot reasonably be accepted as a valid basis.”
As to the costs applied by the Fund insurer, the Adjudicator analysed the amounts deducted and found they averaged over the period of the contributions to 25,9%, “a far cry from 3 %.”
What was more concerning, however, is that much of these costs were not mentioned or clearly quantifiable in the rules of the Fund and therefore could not be lawfully deducted from the Complainant’s contributions.
The Adjudicator ruled that the Complainant was entitled to his payment of the monthly equivalent of an annual pension of R 24,883.
Comments Mr Vinnicombe, “This is heartening news for us as members of funds, where a value is advertised and a lesser figure is offered.”