Occidental's Payout Shocks Policy Holders
Sydney Morning Herald
Friday April 16, 1993
When 75,000 Occidental Life and Regal Life policy holders receive notification of their policy transfer values in the next few days many will be in for a shock.
The life insurance, superannuation and savings plan policies will in future be managed by Mercantile Mutual Life after a deal sewn up three months ago.
But after being told in earlier communications from the judicial manager of the two companies, accountant Mr Richard Grellman, that they could expect to receive between 94c and 100c in the dollar on their policies on the conclusion of protracted legal proceedings to claw back assets from various parties during the past two years, many policy holders have been alarmed to find that they have lost up to 50 per cent of their June 30, 1990, balance.
The last balance figure provided before the two companies became the subject of a fraudulent and aborted sale to a $2 shelf company in September 1990.
Since then most policy holders have had their funds frozen.
The only policy withdrawals allowed have been for death and disability claims and in some cases where policy holders pleaded they were in desperate financial circumstances and needed to cash in their policies to pay bills.
A few weeks ago, after outstanding legal issues were finalised Mercantile Mutual Life won a tender for the policy holder base and the right to manage$500 million of assets left in the two companies.
Mercantile Mutual is offering Occidental and Regal policy holders bonus incentives of up to 15 per cent over two years if they do not withdraw their funds, or if they continue to pay premiums and contributions on their life insurance and superannuation policies.
Agents who sold the Occidental and Regal policies and have received lists of transfer values for their clients' policies say they cannot understand why some policy holders appear to have lost considerable sums on their policies in the past three years and some are in front.
They are particularly upset that some policy holders who accepted the judicial manager's advice during 1990 and 1991 and have continued to pay premiums on their policies have lost a lot of what they put in over that time, despite several assurances from the manager that they would not be disadvantaged for keeping their policies current.
Several Occidental agents have met Mr Grellman to voice their concerns on the discounted values.
Mr Grellman has acknowledged there could be mistakes in the calculations as there are so many policies, but has assured them that any amounts that appear to be inconsistent or incorrect could be put to his office to be checked for accuracy and corrected if necessary.
Mr Grellman said actuarial consultants were engaged to perform a cost/benefit analysis, provide projections and offer an impartial view of the future outlook for policy holders continuing premium payments for savings and superannuation policies.
In a circular to clients in 1990 he said continuation of premium payments"would not disadvantage any individual policy holder and most policy holders would be directly advantaged by continued premium payment".
"Continued premium payment is to the overall advantage of policy holders generally," the circular said.
One policy holder whose policy balance at June 30, 1990, was $7,661.02 and who paid a further $6,568 in the past two years has been told his policy is now worth $5,434.75 and that charges and fees have exceeded investment income in the period by $8,164.54.
According to the agent concerned, his client is understandably livid, as he has lost more than he had in the fund 2 1/2 years ago and has not been given a satisfactory explanation of where the additional $8,000 has gone.
Mr Grellman has checked on this figure and has confirmed that while the transfer value is correct, the figure for contributions since September 1990 has been overstated and the true figure is $1,200.
Another policy holder whose policy balance at June 30, 1990, was $21,990.35 and who paid a further $2,286 since then has had charges and fees exceed investment income by $5,072.28, leaving him with a transfer value of$17,998.45.
Another, who had a balance of $2,487 at June 30, 1990 and has contributed a further $3,000 since, has had $2,340 deducted, leaving a balance of $2,696.
Others, while showing improvements in their net positions, have had large fees deducted from their policy balances that have not been itemised.
Mr Grellman said the differences in the policy transfer values could be explained by a number of factors, one being the June 30, 1990, balance was given as an accumulated value when the cash value or discontinuance value figure, which was much less, should have been used.
It was this latter lower figure that was relevant now, he maintained, given the alternative to handing the business over to Mercantile Mutual was liquidation of the funds.
Also, he said, differing expense ratios attached to different types of policies.
Expense levels also varied depending on when the policy was taken out, being heaviest in the early years of the policy. With superannuation policies, a 15 per cent contributions tax had to be deducted from additional contributions and the concessional tax rate paid on investment earnings.
Life insurance contracts had to have the cost of death cover deducted. If no new money went into the policies since September 1990, these fees had to come out of the policy's given value at September 30, 1990.
Mr Grellman said the transfer value "represents a fair value" for the benefits accrued and purchased to date under the policy.
"Where the assets of a statutory fund are sufficient to meet the total of the accrued benefits for the policies in that fund, these policy values will be transferred and credited as the initial deposit under the restructure contract.
"In this way policy holders will receive full value for the accrued benefits under their existing contracts," he said in one of his memos.
"Where the assets of a statutory fund finally prove insufficient to cover the full policy values to be transferred, then it will be necessary to reduce the policy values transferred and credited under the restructured policies to the level that equates to the value of the assets available."
Mr Grellman said that for payments received after September 30, 1990, policy holders would receive the full policy value generated in respect of those premiums.
Those communications were overtaken on April 8, 1993, in an agent update when Mr Grellman informed agents the costs of setting up and administering a policy - which are usually deducted over the term of the policy - had to be crystallised because it was not possible to transfer policies that allowed the charges to be deducted over the full term of the policy by Mercantile Mutual.
The effect of this is that no further charges are payable on the policies, but that policy holders wear the full brunt of the charges now.
The agents are critical of this approach, claiming it means policies are effectively given a surrender value applicable in the case of voluntary discontinuance of the policy. In fact, their policies are being forcibly transferred to a new manager who is picking up 75,000 policies at no cost now, instead promising to pay future bonuses of up to 15 per cent if policy holders stay with the new manager.
The managing director of Mercantile Mutual, Mr Phil Shirriff, said all the transfer values were determined by Mr Grellman's actuarial staff and Mercantile Mutual was therefore not responsible for the values.
© 1993 Sydney Morning Herald
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