CR212 Annuities – Complainant contending that his pension increase was inadequate.

See too: Annuities, CR,

CR212

Annuities – Complainant contending that his pension increase was inadequate.

Background

The complainant was a pensioner of an employer pension fund, and had been receiving a pension from the fund. In 1998 the fund offered all pensioners the option of purchasing “with profits” annuity policies in their own names from an insurer, and the complainant elected to do so. All the pensioners who made this election thus terminated their membership of the pension fund and transferred their assets to the insurer, a transfer that was approved by the Registrar of Pension Funds in terms of section 14 of the Pension Funds Act. The fund was subsequently liquidated in 1999.

The complainant was very unhappy with the performance of the assets administered by the insurer as translated into the declared annual pension increase on his annuity policy. He stated that the essence of his complaint was the “disappearance” of a guaranteed minimum annual pension increase of 3% which he had enjoyed in terms of the pension fund rules. In his view this liability was transferred from the fund to the insurer.

The insurer pointed out that in terms of the fund rules, on the purchase of an annuity in the name of the pensioner, the fund would have no further liability in respect of each pensioner. His pension increase was thereafter contractually provided for in terms of the with-profits annuity. The fund did not purchase a guaranteed minimum annuity increase from the insurer. The policy required the insurer to determine the increase in annuity, if any, with reference to the bonus declared by the insurer for the participation category applicable to the annuitant, and that such increases, once granted, should not be withdrawn.

Discussion

We noted that the fund had added 10% to the value of the pension transferred to the insurer. This took into account the consequences of the guaranteed 3% increase no longer being applicable to the outsourced pensions. Furthermore, upon liquidation of the fund a further increase of 13 % was granted. These increases of 23% were in addition to other smaller annual pension increases.

The insurer provided an explanation for the manner in which pension increases were related to investment performance, specifically in the pensioner-only asset portfolio in which the assets backing his annuity were invested. In order to meet the guarantee of paying his pension for life, as well as any increase, once granted, for life, the fund had to be prudently managed, with most of the assets invested in bonds to minimise risk, and with smoothed returns. Taking into account a pricing interest rate (purchase rate) of 5.5%, only investment returns over and above this were available for increases. Thus based on an average investment rate of 8%, pension increases of approximately 2.5% could be expected over the long term.

Result

In our view the complainant had received reasonable pension increases over the long term, especially taking into account the additional values on transfer from the fund, and the insurer having complied with its contractual obligations, we could not take the matter any further.

SM
May 2007

Download Attachments

Sub Categories

Subscribe to our Newsletter