The National Treasury today released a discussion paper outlining far-reaching proposals designed to improve the cost and fairness of contractual savings products offered by the South African life insurance industry, such as retirement annuity funds and endowment policies.
Although there is currently a broader process of retirement reform underway, certain issues that are particular to the retirement savings products offered by the insurance sector require urgent attention.
The discussion paper follows the signing of a Statement of Intent between the Minister of Finance and the long-term insurance industry in December 2005 and is the outcome of extensive consultation with representatives from the insurance and intermediary industries. Though the Statement of Intent primarily addresses issues of poor benefits in the event of early termination of contributions, the agreement also included a commitment to examine other issues impacting on costs, including commission structures, disclosure standards and consumer education.
reducing barriers to effective competition, to be informed by a joint National Treasury, Financial Services Board and Competition Commission investigation of the insurance sector and other service providers in the long term contractual savings market; and improving disclosure requirements, consumer education and product standards.
issuing a Code of Governance for Trustees to clarify the fiduciary duties of the trustees of retirement annuity funds; and issuing regulations and model rules on matters that must be included and addressed in all retirement annuity fund rules.
requiring that intermediaries must declare themselves to prospective policyholders as either an insurer agent or an independent financial advisor - the distinction being that insurer agents must be remunerated by the insurer only and independent financial advisors must be remunerated by the customer only; and requiring that only independent financial advisors may describe themselves as "advisors" or "providing advice"; and improving the quality of investment advice through higher standards of intermediary education and implementing a system of accreditation.
making allowance for transitional financing arrangements for small and emerging intermediaries so as to continue to support access to savings products by low-income investors; and applying the principles of commission regulations in a consistent manner to both risk products and savings products and determining a consistent approach for single premium products.
regulations to give effect to the agreement contained in the Statement of Intent on minimum early termination values applicable to existing policies and policies terminated after 1 January 2001; and regulations covering enhanced minimum early termination values, to be applied to new policies from a date of implementation to be specified in such regulations, that provide for a graduated set of minimum values and an appropriate sharing of the risk of early termination between the policyholder, insurer, and intermediary, aligning as far as possible the interests of all parties.
It is anticipated that these measures will result in a significant improvement in cons umer perceptions of the value offered by the savings products of the longterm insurance industry, particularly with respect to the burden of cost in the event of early termination.
The discussion paper contains recommendations on principles of reform and high-level proposals, with a view to eliciting comments that will assist in crafting detailed proposals and revised regulations. The process going forward will entail further consultation with all stakeholders.
The discussion paper is available on the National Treasury website: www.treasury.gov.
The closing date for comment is 15 May 2006.