CR173 Annuity – purchased with no escalation option

Annuity – purchased with no escalation option – complainant queries non-escalation of monthly income – complainant alleges he was not a party to the agreement


Mr A qualified for early retirement under a retirement annuity due to ill health. One third of the proceeds of the retirement annuity, R18 000, was taken as a cash lump sum and the remaining R36 030,93 was utilised to purchase an annuity. On 1 December 1994 a single life annuity guaranteed for 10 years without an escalation option was effected and provided a monthly income of R509,43. Mr A complained to our office during February 2006 that he was not a party to any agreement that the monthly income should not escalate annually.


In response to Mr A’s complaint, the insurer advised that it had no record to prove whether Mr A selected the escalation option on the monthly income. It contended that, in view of the fact that 11 years had elapsed since the annuity was effected, Mr A had ample time to complain about the non-escalation of the monthly annuity income.

The insurer was unable to produce an application form or quotation confirming Mr A’s selection at the commencement date of the annuity on the office’s request. The office expressed its concern to the insurer for its lack of contractual documentation on a policy that was still in force.

Although the insurer could not produce an application form or quotation for the particular policy it nevertheless produced a pro forma quotation reflecting what the total income received would have been had Mr A opted for a 5% escalation at inception. For the period 1 January 1995 until 1 June 2006 the insurer paid an actual, total income of R70 301,34 to Mr A. According to the quotation with the 5% escalation option, Mr A would have received a total income of R70 057,74 for the same period. The insurer indicated that Mr A would therefore have to repay an amount of R243,60 that was overpaid if he now accepted its offer to implement the 5% escalation option from inception. If Mr A accepted the offer, the insurer indicated that his income would increase to R662,95.


The office recommended to Mr A that he should seriously consider accepting the insurer’s offer as it has agreed to place him in the position he would have been in had he requested an escalation from inception. Mr A was, however, not happy with the quantum presumably because of the favourable returns in the South African market at the time.


The office has an internal procedure in place that if a complainant is not satisfied with the provisional ruling of the investigating adjudicator, the matter is reallocated to another adjudicator for a second opinion. This procedure was introduced by the office not only as a measure of reassurance to the complainant but also to ensure consistency inasmuch as the matter would then be reviewed by a “fresh pair of eyes”.

Another adjudicator confirmed that the offer made by the insurer was fair. However, the adjudicator was able to negotiate further with the insurer to waive the amount of R243,60 owed by Mr A. Mr A eventually accepted the insurer’s offer and the annuity was amended from inception with a 5% escalation option.

November 2006