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Life Industry
Friday, August 1, 2008
A step in the right direction

Life commission reforms are set to be introduced August 2008. Treasury made proposals to change commission structures and reduce penalties on the transfer of retirement annuities earlier this year.
It seems the financial services sector is broadly in support of the reforms, saying these will be a great benefit to the average investor.
However, Nick Battersby, CEO of PPS Investments warns that the positive spin and hype being placed on these proposed changes to underwritten products must be objectively assessed. This is particularly as regards retirement annuities where, he points out, there are currently two different product structures: the traditional under-written RA as provided by life offices, and the unit trust based RA (so-called ‘new generation’) as provided by linked product companies and asset managers.
“This is an important distinction,” he says, “since the issues addressed in the Treasury reform paper are only relevant to the traditional products.”
The proposals should make it easier to migrate from a traditional product to a new generation RA product. The latter already address the issues concerning commission levels, and the timing of when they are paid, and offer significant reductions in the penalties that are charged by traditional funds.
While the penalties to migrate have not been removed entirely, the drop from 30% to 15% is a step in the right direction. Up front commissions will now be limited to 50% of the full amount. This still falls short of the arrangement with the new generation unit trust based RAs where fees are only levied at the time of the premium payment, that is, on an ‘as and when’ basis.
Says Mr Battersby, “The announcement of these proposals has certainly led to an even greater number of investors seeking to transfer to the much less expensive and simpler model of the new generation RA.
“A relatively simple calculation will illustrate the break-even point and hence whether or not it makes sense for the investor to incur a short-term penalty in the interest of a lower cost environment for the rest of their contributing period. With the reduction in the maximum penalty, the barrier to leaving an under-written fund has been halved.”
The move towards an as-and-when commission model will in all likelihood hurt some intermediaries, especially those who were not servicing the financial needs of their clients on a continuous basis, he observes. “But the positive spin-off from this model will encourage a more professional and continuous service being offered to the investor.”
Mr Battersby offers the following advice for people looking for a new RA. “Certainly, the traditional product has become slightly more attractive to investors than it was before. However an in-depth comparison with the new generation product is essential and specific to each individual.
“A thorough analysis and understanding of the terms and conditions are essential; for instance, what investment options you have when switching, or whether there are heavy annual policy costs and so on. For those in traditional RAs, a reduction in premium will still incur a penalty, although it will soon be reduced. For those looking to transfer their RA, find out what your penalties would be and ask your financial adviser to assess the cost differential for you.”

Copyright © Insurance Times and Investments® Vol:21.7 1st August, 2008
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