Momentum client outraged at 40% penalty

Life company says clarity is needed on 30% maximum penalty legislation.

JOHANNESBURG – A Momentum client is outraged after being quoted penalty fees that amount to more than 40% of his investment. This is despite regulatory changes introduced in 2009, that prohibit insurance companies from charging more than 30% in penalties.

The client, Mr B, bought his Momentum retirement annuity (RA) in 2003. His funds were invested in two funds: the Allan Gray Balanced Fund and the Allan Gray Stable Fund. Later, he started contributing to another RA, this time sold by Allan Gray, but with the same underlying funds.

After a period of contributing to both RAs, Mr B noticed that the Allan Gray product was performing better than Momentum’s. The underlying funds were exactly the same. Thus the only explanation for Momentum’s worse performance was its higher fees.

In July 2011, Mr B stopped contributing to his Momentum RA. He was levied with a penalty amount of R18 519, which amounted to 18.7% of his fund value at the time (R99 227). In addition to this penalty he was charged a policy administration fee of R557.50. Mr B says he was given the impression at the time that there would be no further penalties.

In April 2013, Mr B requested that his Momentum RA be transferred to Allan Gray. He was shocked to be quoted a penalty of R24 267. This amounted to 23.7% of his fund value, which stood at R102 540. Thus, if he were to do the transfer, Mr B would be charged total penalties of more than 40% of his fund value.

Mr B’s current financial adviser informed Moneyweb of his client’s predicament. Moneyweb in turn asked Momentum for an explanation.

Werner du Plessis, head: service support specialists at Momentum Retail responds that the issue of how penalties are applied is currently “being clarified” at an industry level. Du Plessis says that the existing interpretation of how penalties are applied does not take into account the number of alterations done in one contract. At present, Momentum’s system applies the maximum of 30% to each “alteration”. Thus it is possible for clients who alter their retirement annuity more than once to incur penalties of more than 30%.

Says Du Plessis: “Until the industry has made a ruling, we will continue to individually evaluate all queries.  Where a case can be made in recovering less of the outstanding costs, we will give the client the benefit.

“Once the interpretation is made clear at industry level, we will change our system accordingly.”

Momentum assessed Mr B’s case, and decided to limit penalties to an overall maximum of 30%.

“We have made the necessary calculation and will deduct costs not exceeding 11.77% of the fund value. This percentage, together with the previous 18% deducted will fall within the 30% maximum limit,” says Du Plessis.

Mr B’s financial adviser, Anthony Field-Buss, says he will discuss with his client whether it’s worth incurring the 11.77% penalty and moving to Allan Gray. Field Buss says that over the long term it may make sense to move the RA because Allan Gray’s costs are so much lower than Momentum’s. Field Buss is sceptical of retirement annuities sold by insurance companies such as Momentum and Old Mutual. He was not Mr B’s financial adviser when the Momentum product was purchased.

Says Field-Buss: “A life insurance company should only do life cover and not investments. Investments should be left with asset managers.”

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