It has been called the largest admission-of-guilt fine in SA history, or (raising connotations of guilt payments after a war) reparations. The members of the Life Offices Association (LOA) prefer to call it a settlement.
The life offices will be paying between R2,6bn and R3bn (out of shareholder funds - other policyholders will not be prejudiced) to top up the fund values of clients who received poor termination values when they ended their investment contracts.
The deal is something of a relief after a year when the industry changed long-entrenched practices because of rulings by the pension funds adjudicator (see Cover Story).
It is agreed that for all retirement annuities (RAs) where there was an early premium cessation after January 1 2001 - reductions in premiums, ending of premiums (making the policy "paid up"), shortening of the term - the payout will be increased to at least 65% of the investment account.
The chief executives of the five major life assurers - Old Mutual, Sanlam, Liberty Life, Momentum and Metropolitan - have all signed the agreement, but it still needs approval from their respective boards.
Estimates have been given of the expected costs. Relative to market capitalisation, the most affected will be Liberty, which is expecting to pay out between R550m and R600m; Old Mutual, R515m-R635m; Sanlam, R500m; Momentum, R225m-R250m (including recently acquired Sage); and Metropolitan, R120m.
Citigroup analyst Johny Lambridis says the settlement will take 1,6% off the industry's total embedded value (net asset value, plus the value of existing business). He says Liberty's bill was higher than he expected, but slightly below market expectations.
"Settlement" is the word being used, but there is no guarantee that the pressure from the PFA will disappear. Deputy adjudicator Naleen Jeram said on radio that in principle his office supported the agreement, but he doubted that complaints would stop.
Finance minister Trevor Manuel describes the agreement as a "great step forward, which provides a measure of restorative justice and a bulwark against systemic risk, but which gives sufficient incentive to ensure that people remain policyholders and . . . encourages savings in the future."
But a delicate balance will be upset if future PFA rulings undermine the agreement. So the approval by the industry boards of the R2,6bn-R3bn payout will be a useful bargaining chip if the LOA perceives it is not being met halfway.
Old Mutual SA MD Roddy Sparks says there is no blanket arrangement that will end complaints, but the industry should get credit for constructive engagement: "It was a tough negotiation and no side got its way."
A key part of the settlement is that Manuel has undertaken to get the PFA, the financial services ombud and the long-term insurance ombudsman to agree on the boundaries of their respective jurisdictions. That should give legal clarity to the life industry, which has always considered most problems around RAs to be insurance rather than pension fund issues.
Sparks says it would be misleading to argue that the rulings jolted the life industry out of complacency: "We had already been improving our termination values, often above the new minimum standards, long before the rulings. And we had already improved disclosure on costs and the effect of stopping payments early. But the agreement certainly forces us to deal with historical issues, and the holders of some of our older-generation products will be compensated."
In spite of the poor press, sales of life policies increased last year, and judging from the recent spate of trading updates, sales will be up 10%-12% for the year, or 6%-8% in real terms - though primarily in single-premium and recurring risk-cover products, rather than recurring savings products.
On that basis, life companies, which have sharply underperformed the rest of the JSE this year, look cheap. Growth should be higher next year after the settlement. LOA chairman Mike Jackson says he hopes the commitment to minimum standards will justify ("restore" would have been a better word) consumers' confidence in the sector to act as custodians of their savings.
The LOA is co-ordinating a consumer awareness campaign to explain minimum standards, and the industry now has the opportunity to explain the benefits of its products more thoroughly.
It will certainly take a lot more than a few handouts to improve its image.
