Hide and Seek with Financial Consequences

Unlocated pension plan members have long been a problem for virtually every pension plan and unfortunately this problem will never really go away.  The best that a plan administrator can do is take their fiduciary duties seriously and employ various strategies to reunite wayward former pension plan members with their hard-earned benefits.

On that note, the Financial Services Regulatory Authority of Ontario (FSRA) is currently conducting public consultations on two draft guidance documents: Principles and Practices Regarding Missing Members, and Waiver of Biennial Statements for Missing Former and Retired Members.   The deadline for comments is September 20, 2020 and I imagine that these policies will be finalized soon thereafter.  At that point, pension administrators will be on notice to make sure that they have a robust process in place to address unlocated members.

Old Problems

Unfortunately, the primary responsibility to keep contact information up to date rests with pension plan members, many of whom have a human tendency to be inattentive to financial matters, especially those that don’t impact their day-to-day living. 

Of course, pension plan administrators also have a responsibility to track their former members.  While recordkeeping systems and practices have continuously evolved and improved, the fact that pension promises last for many decades provides ample time for things to go amiss.  Although this problem has continued to grow over time, thankfully the options available to find lost members has also increased largely thanks to online social networks, so many plan administrators do have policies in place to search for former members.

The problem with unlocated members came to the forefront a few years ago with the introduction of annual or biennial statements to deferred vested and retired members.  It’s probably not good fiduciary practice to send out a document filed with private and confidential information to an address you suspect is no longer valid!

Current Solutions

Ironically, the relatively new requirement to send out regular statements to deferred vested and retired members is part of the solution to frequently communicate with former pension plan members to remind them of the need to keep the plan administrator apprised of any address changes.  I predict that we will ‘lose’ far fewer former members going forward, given that we will find out much sooner that we’ve lost them and can potentially start searching immediately.

As FSRA helpfully points out in their new missing member guidance, terminating pension plan members deserve extra attention when they’re being presented with paperwork as they exit:

  • Reminding them to promptly notify the administrator of any changes in address.
  • Letting them know that governments will not automatically provide updated contact information to the administrator on behalf of the former member.
  • Obtaining advance consent from the former member (or even existing active members) to publish their personal information and authorize government departments to release personal information should they become unlocated in the future.
  • Immediately contacting former members who do not complete their termination paperwork, and therefore get defaulted to a deferred pension, to confirm the default election and again remind them about providing updated contact information.
  • Forcing immediate cash-outs of any benefits that fall under the ‘small amount rules’.
  • Re-engaging with former members as they approach retirement eligibility.

With respect to retirees, we highly recommend the periodic performance of ‘pensioner audits’ to help uncover updated contact information or unreported deaths.  These audits require a positive response from every single pensioner, and if there is still no response after a number of follow-ups and other attempts to contact the pensioner, plan administrators will usually presume the retiree has died and cease pension payments.  This will sometimes cause the missing retiree to resurface in a hurry with updated contact information (and the resumption of pension payments, with a catch-up payment if necessary).

Despite best efforts, the reality is that former members will continue to go missing.  At that point a good fiduciary will take reasonable measures to locate the former member.  They key here is ‘reasonable’ and that will be up to the plan administrator to decide based upon a number of factors such as:

  • How long has the former member been missing, since the chance of success will decrease with the passage of time.
  • The age of the member, since it may be easier (and more rewarding) to find the former if they’re eligible to commence their pension.  On the other hand, if the member is calculated to be at an advanced age then it may be worth checking obituaries in order to make contact with the heirs and pay out the death benefit.
  • The cost and effort to perform the search.  FSRA helpfully lists a number of search tactics in Appendix 1 of their guidance on missing members.  Some items will require little effort (e.g. searching LinkedIn or Facebook), some will require a modest cost (e.g. sending a registered letter to a last known address), and some will cost real money (e.g. engaging a professional search firm).
  • The size and value of the monthly pension, since more effort should be expended to find former members with larger benefits.
  • The number and frequency of unlocated members, since it may be more efficient to search for a larger number of members at one time.

Plan administrators are encouraged to document their processes and procedures that will be followed when members become unlocated.  In addition, any efforts undertaken in an attempt to locate former plan members should be thoroughly documented to demonstrate the fulfillment of fiduciary duties and to aid in future searches.

Current Distractions

Now let’s turn our attention to the guidance document on waivers that was also released for consultation.

While I’m totally in favour of increased communication with former and retired pension plan members by requiring regular member statements to be sent out, it seems idiotic that you would need an official waiver from FSRA to not be forced to send a statement to an address that you know is incorrect.  Hello privacy breach!

FSRA’s draft guidance on waivers goes into excruciating detail on how you would apply for a waiver, the criteria for FSRA’s approval, and the continuous need to apply for new waivers for missing members and revoke existing waivers when members are found; however, near the beginning of their guidance, FSRA very helpfully points out that there is no requirement for a plan administrator to apply for the waiver.

Hallelujah!  What should be obvious to any fiduciary is a duty to conduct reasonable searches for unlocated members in an effort to deliver the promised benefits.  So, as long as the plan administrator can demonstrate that they have conducted appropriate search activities they will be off the hook if anyone asks.  Only those administrators who wear belts and suspenders at the same time will feel the need to go through the waiver process.

Future Remedies

Given that the problem of unlocated pension plan members will never go away, I was happy to see some of the other longer-term recommendations from FSRA’s advisory committee on missing members.

In particular, FSRA will begin to collect information on the scope of the problem and will continue to consider additional solutions, such as:

  • Establishing information sharing arrangements with other ministries, departments and agencies of the government of Canada and the provinces to improve the ability to locate missing members.
  • Creating an optional search tool hosted by FSRA to help reunite missing members with plan administrators.
  • Increasing the small benefit thresholds.
  • Providing a mechanism for a discharge for unlocated former pension members at a very advanced age.

However, what’s really missing in Ontario is someplace for plan administrators to send money on behalf of unlocated members, thereby transferring the responsibility for these benefits to a government entity.  The Bank of Canada does this for unclaimed bank balances and some provinces such as Quebec, Alberta and B.C. have unclaimed property departments which will accept pension benefits.  To me, the obvious answer in Ontario would be to transfer the unclaimed pension benefits to the Pension Benefit Guarantee Fund (PBGF), which presumably could use the extra funds as they always seem to be running a bit low.

Today’s Homework

Pension plan administrators should take stock of the number of unlocated members in their pension plan and ensure that they have a reasonable and well-documented search process that works to reunite former members with their long-lost pension benefits.

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