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Gareth Morgan - The Big Game I - How the savings industry takes your money and keeps it | The Big Game I - How the savings industry takes your money and keeps it | | investment - 3 November 2006 - 8217 views |  Printable version
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How the savings industry takes your money and keeps it.
Gareth Morgan investigates, in the first of a six-part series.
The National Business Review
October 13, 2006
If the government doesn’t clean up the $60 billion savings and superannuation sector (representing some 20% of household wealth excluding the family house), New Zealanders should ignore any incentives and tax breaks that Kiwisaver might offer because they will probably lose far more by placing hard-earned savings into life insurance company pooled savings and superannuation schemes.
The practices of the international life insurance industry have been examined on a number of occasions. These studies have almost unanimously concluded the industry has endemic misconduct problems, reneges on duties to its savings and pension fund customers and usurps their rights and interests.
One response from the regulators is to bring the industry under the authority of the securities laws in an attempt to force change. Appropriate securities laws can improve the manner in which industry behaves.
Incredibly, this industry even when operating within the sphere of the Securities Act and regulations, simply ignores its obligations and regulators have proved impotent to change that.
Further, the cost to go to court relying on the Securities Act for any disgruntled saver is more than the entire savings of one lifetime. This gross asymmetry of financial resource has been cynically capitalised on by the industry.
Savers have no chance against an industry that dominates the circumstances of the saving relationship in all possible ways. But the primary barrier to stopping life insurance industry malpractice remains its exemption from the same levels of outside scrutiny as other issuers of securities. It has been the convention that the life insurance industry and its products be covered by its own specific legislation which allowed, until the Securities Amendment Act 1996 came into force, the industry to be exempt from securities laws.
This change hasn’t stopped misleading practice. The requirement to issue an investment statement and leave a prospectus as the office open for inspection (if you can be bothered to go have a look) makes it just slightly more obvious than before. For example, see if you can find reference in the small print to fees and charges being unlimited and uncapped in the future, maybe even retrospectively, at the discretion of the company without notice.
Protected behind a veil of non-disclosure, obfuscation has become the norm of savings products dressed up as quasi-life insurance products. Consumers are totally helpless in determining their entitlements, left unable to verify they haven’t been ripped off.
This first article will give just one example of how consumers are disadvantaged – the unilateral, undisclosed and retrospective changes to the wording of a long-term, unit-linked collective savings product. Having been queried on the changes, the company in this case denied the terms and conditions had been altered over time although it was clear that changes had occurred and were to the detriment of all customers investing in the product.
The fact that over a 5 to 10 year period approximately 80% of product contracts are lost and require replacement opens the door for unscrupulous operators to make surreptitious alterations over time with out disclosure, so that replacement “fake” contracts appear the same as the original (and are represented by the company to be the same as the original). But in reality these actually give effect to actuarial advantages and financial reporting that grossly disadvantage the saver.
In this case, the company’s sales material, specimen policy documents, brochures and illustrations used by sales agents, who were also not aware, were not altered to reflect the surreptitious wording changes made.
Even replacements were issued on the basis of suggesting it was a copy of the original form of the document, when in fact the company was issuing an entirely different form of contract over time.
- Altering fee calculations so they became unlimited:
Surreptitious removal of the 1-35% limit range for an early reduction fee in the even of terminating or ceasing contributions so there was no reference to the percentage that might be charged in the future. This implied fees could be unlimited and entirely up to the company’s discretion.
- Altering how much of your investment account you can withdraw:
Surreptitiously altering the wording (again creating yet another amended or new security), so as to lower the partial cash-in value of the full investment account value by making it subject to an early reduction fee. The changed document is a replacement of the original security.
- Losing all your funds if your regular contributions stop:
Surreptitiously altering the wording of the original version of the contract by inserting the words “payments will continue” in place of “you may continue to pay” contributions. The effect is that if the contributions were not continued then all funds invested were lost of inaccessible until contributions were continued and termination fees (now uncapped) could be applied. Despite this, the firm continued to promote the product in brochures as a flexible stop and start investing product with access to the money when you need it and as providing collateral security for loans. These forms of arrangements (similar to Tontime schemes) were outlawed in the US many years ago as it resulted in exiting members terminating at great loss and the remaining funds accumulating for a few who were left – usually the custodians of the fund who originally established it.
- Free death benefit capped and reduced:
These forms of savings investment with life insurance company custodians require a complimentary or free element of life cover to ensure they comply as policies of life insurance despite being in an economic sense only investments. The “free cover” offered was obviously a potential liability risk for the company and so over time the wording of the contract was surreptitiously altered to limit and reduce the impact of the free cover. Again the sales material was not altered to replicate the secret changes.
Worse, in the company’s over-anxious haste to reduce the liability it forgot that if it limited or capped the element of free life cover then it potentially stopped insuring and the security no longer could be called a policy of life insurance. The company was no longer in the business of life insurance but rather was taking in funds from the public under a false misrepresentation that it was a life policy. The investors thought they were entitled to tax paid benefits when they were not.
The original investment contract stated: “The maximum amount payable under this Special Death Benefit will be the value of your Investment Account plus $50,000.”
The altered investment contract stated: “The Special Death Benefit payable under this policy shall not exceed $50,000 inclusive of any similar benefits on other policies on the life of the Life Insured with (our company)…”
In this one example (thanks to public response I have many more documented) it is estimated the company gained an advantage of $50 million from its customers.
Contrary to the life company’s marketing message, the add-on life cover is not a benefit for the consumer but rather a device to enable the company to take funds in and apply discretions to them that escape scrutiny. The lack of transparency is so serious it can do things such as unilaterally backdate wording changes to savings and insurance securities without disclosure or consent.
What’s next: How life insurance companies create reserves with your savings and then methodically and deliberately free those reserves over time so they become their property rather than yours.
Smart ways to outwit the saver
- Bundling long term savings (superannuation or pooled investment) products together with a life insurance component purely to ensure the undisclosed discretions of the life insurance industry can be applied to the savers' pooled money.
- Arguing that savers in such products are "unsecured creditors" rather than investors. Rather than treat customers' savings as purely the property of the client, they are treated as the property of the company enabling use of wide discretions and actuarial techniques to create "reserves".
- Using in-house undisclosed actuarial techniques to periodically declare arbitrary portions of such reserves as coming "free," enabling those reserves to be deemed the property of the insurance company rather than that of the policyholder/investor.
- Purposely designing product obsolescence so that investors surrender products or transfer out of funds early before maturity, at a large discount to ultimate surrender value. The difference becomes the property of the company.
- Deliberate mis-pricing or misrepresenting values of units in unit trusts, or altering buy/sell margins, all again to the benefit of the company and the disadvantage of the investor.
- Containing complaints and burning off disaffected customers.
- Inserting discretions to permit fees and charges to be increased in the future on an unlimited basis without notice, while offering at the time of sale attractive returns and apparent low charges to entice investors to invest into the scheme.
- Altering the terms and conditions of savings and superannuation scheme products and trust deeds a few years after the market has been captured with attractive "display shop front" terms and conditions.
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