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Life Policies
Friday, December 1, 2006
Saving you money

The Life Offices’ Association (LOA) is concerned that many policyholders continue to make decisions about savings and investment policies without properly considering or understanding the impact of charges.

Says Gerhard Joubert, chief executive officer of the LOA, “The complexity of fee structures often makes it difficult for clients and their advisers to make proper comparisons of charges before deciding on a product. The LOA therefore introduced a new Code on Policy Quotations last year, which requires all member companies to summarise all their actual charges in one figure. This is referred to as the ‘Reduction in Yield’ (RIY). And this must be clearly indicated on all quotations for new savings and investment policies.”
The RIY summarises all the charges that you will pay on a specific policy and express them as a single figure. This will show how much of the annual investment return of your policy is needed to cover the policy charges. The lower the RIY, the lower the policy’s charges, leaving you with a higher net investment return from your policy every year.
The usual charges that are levied against any investment or savings policy are generally a combination of the following:
• initial fees
• annual administration fees
• annual management fees
• performance fees
• fixed rand or percentage policy fees

Mr Joubert says by summarising the above charges in one figure, the RIY provides financial advisors and consumers with a simple, yet accurate way of analysing and comparing the charges of different companies and different products. This should help clients choose a product that is fairly priced.
If you see an RIY of, say, 3% on the savings product you will know that the gross investment return earned on the policy will be reduced by 3% every year. If the gross return was 15% for that year, then you would expect to earn a net 12% on the policy after charges. Also, if you compare similar products from competing life companies, you’ll immediately know that the lowest RIY indicates the lowest charges.
Mr Joubert adds, “However, apply some caution though.
“The cheapest product is not necessarily always the best. With the help of your adviser you need to consider the product features together with the cost implications, as illustrated by the RIY figures.”
A savings policy that offers guarantees or is invested in a smoothed bonus fund, for example, will be more expensive than a policy invested in a market linked fund. Also, an investment in a money market fund would typically carry a lower RIY than an investment in an equity fund. Some policies might display higher RIY figures, especially if the underlying funds applied performance fees. But then the higher charges may be warranted if these funds consistently outperformed their peers and their benchmarks.
He says when selecting a savings policy, your adviser should help you select several policies that offer similar features likely to help you meet your savings needs. If, for example, you are risk averse and require guarantees or smoothed bonus features, select similar products from competing life companies that offer these features and then compare the RIY. If the features and the underlying portfolios compare well, you should opt for the product with the lowest RIY.

What life companies must show you

The LOA Code requires life companies to calculate the RIY based on the full actual expense charges applicable to all policies with a savings element and all living annuity policy contracts.
The RIY must include all charges and fees (including distribution, advice, commission, administration, asset management fees, as well as fees for guarantees and smoothing). Where policyholders can choose from different underlying portfolios, the RIY must reflect the average asset management fee for all the funds available. In the case of multi-manager funds, fund of funds, wrap funds and hedge funds, the various levels of management charges must be included in the asset management fee used in the RIY calculation. Where fees in underlying funds vary greatly, the RIY must be shown as a range or the worst possible RIY must be shown.
To accommodate the growing trend towards performance fees, the LOA code states that where the asset management fee is entirely or substantially based on performance, the RIY must include an allowance for the performance fee.

Copyright © Insurance Times and Investments® Vol:19.6 1st December, 2006
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