Old Mutual under fire for ‘shortfall’ on policies with guaranteed maturity values

Some investors who have received payouts from Old Mutual’s Insured Investment Plan (“Versekerde Beleggingsplan”) or similar Flexi policies may qualify for an “ex gratia” payment where the payouts differed from the guaranteed maturity values in the original policies.

Guaranteed maturity values are not to be confused with projected maturity values, which were frequently used as marketing gimmicks in the past. In most cases projected maturity values were based on growth rates of around 12% to 15%, resulting in more than double the guaranteed maturity values, creating the expectation that final payout values would be higher than the guaranteed maturity values, subject to annual premium adjustments. The Pension Funds Adjudicator questioned the usefulness of projected values some years ago and highlighted the problems caused by not adjusting projected future fund values to the realities of a lower-inflation and lower-return environment.

A Moneyweb reader, Jan Heyneke, who invested in three of the Insured Investment Plan policies with Old Mutual during the early 1990s, recently realised that the payouts he received fell well short of the “guaranteed” maturity values.

His policy documents stipulate that if premiums increased in line with the Premium Adjuster (“Premie-Aanpasser”) annually, the guaranteed maturity values would be applicable at the maturity dates.

It also notes that the total premium would automatically be adjusted with inflation annually “as determined by Old Mutual” and that if the premium-adjustment rate on the policy matched the inflation rate, Old Mutual would determine the increases at its discretion.

In January this year, as Heyneke was about to get rid of the policy documents after the policies matured, he realised that they referred to a “guaranteed maturity value” and that the payments he received fell well short of these values. In fact, he received amounts of between 12% and 24% less than the guaranteed values respectively, totalling about R75 000.

Following several engagements with his broker and in an effort to determine why the payments differed from what was seemingly guaranteed values, Heyneke wrote to Old Mutual to get clarity.

Initial correspondence from Old Mutual included a standard document stating: “As this rate [CPI] cannot be predetermined an illustrative rate is used in the calculation of future values… to provide the client with an illustration of what the GMB [guaranteed maturity amount] would be based on this 12% assumption.”

Old Mutual seemed not to differentiate between projected values and guaranteed values, specifically where it determined the annual premium adjustments, Heyneke says.

Shortly after he presented a copy of an original policy document to the insurer his bank advised that Old Mutual had made three payments to his bank account. Closer examination revealed that the payments reflected the difference between the guaranteed maturity values and the amounts previously paid.

A letter Old Mutual sent to Heyneke explained that a “management decision” was taken to pay the difference between the guaranteed values and the amounts previously paid.

Which bodes the question: Why would a management decision be necessary to pay maturity values that were “guaranteed”?

When asked why the amounts that were originally paid to Heyneke in terms of the policies differed from the guaranteed maturity values, Carmen Williams, complaints manager at Old Mutual, said certain of its Flexi policies were designed to provide for various premium update options and for certain guaranteed maturity Values (GMVs) namely:

• A GMV based on the initial agreed premium and assuming no premium increases; or
• An increased GMV that was applicable if the premiums payable over the term of the policy increased annually throughout the term of the policy.

Williams says these products offered policyholders a choice between two types of premium updates – a fixed premium update rate or an inflation-related premium update with the updates linked to the applicable rate of inflation.

“For the three policies in question an inflation-related premium increase was selected (CPI). The policy contract quoted both the GMV without premium increases (GMV-Level) and the GMV with inflation-related premium increases (GMV-CPI). Both guaranteed values were based on the assumption that all premiums would be paid when due.

“At the inception of these policies (which was in 1992), the CPI rate was 15%. Therefore, the policy contract quoted a maturity value that was guaranteed based on the assumptions that all premiums would be paid when due and premiums increased annually at 15% (as per CPI at that stage) for the full term.

“However, we moved into a low-inflation environment and the CPI rate did not remain at 15% over the full term of the policy. Consequently, with the actual CPI rate being lower than the 15% the total value of premiums paid was less than assumed, resulting in a much lower maturity value.”

Williams says where premiums are increased at CPI, maturity values are checked in relation to the GMV-CPI, based on the actual CPI rates over the term of the policy.

“Where fund performance results in a maturity value less than the GMV-CPI, based on the actual CPI rates, the GMV-CPI using the actual CPI rates will be paid,” she says.

According to Old Mutual many Flexi policies with premium updates linked to inflation have matured over the past decade.

“Where customers have questioned the maturity value in relation to the GMV-CPI, the relevant explanations have been provided. In a very limited number of instances, the specifics of the case have resulted in Old Mutual offering an ex gratia payment,” Williams says.

Asked why a management decision would be necessary to pay amounts that were previously guaranteed, she said the rand amount shown in the contract was only guaranteed on condition that CPI was 15% over the term of the policy.

But Heyneke rejects this assertion, arguing that the policy wording merely referred to the fact that maximum increases of 15% per annum were allowed. He says the choice to leave the discretion to determine annual premium increases in the hands of Old Mutual was taken precisely to avoid a situation where the guaranteed maturity value would be less than stipulated.

Williams says the actual maturity value paid, based on fund performance was in excess of the GMV-CPI based on actual CPI rates.

“The additional amount paid was an ex gratia, not a contractual right.”

Heyneke has informed the Financial Services Board as well as the FAIS Ombud of the situation.

Brought to you by Moneyweb