A pension management task that doesn’t receive much attention is the need to collect and maintain detailed data relating to individual pension plan members.
While the data for active members are usually up to date and relatively accurate, this is often not the case for pensioners and deferred vested members (inactive members). Because an employer no longer has regular contact with inactive members, over time personal data, such as spousal status and mailing addresses, tend to become outdated and inaccurate. However, the importance of maintaining clean membership data should not be underestimated.
Reasons for maintaining clean data, in the case of a DB pension plan, include the following:
- Accurate data are required to properly administer pension benefits. The use of inaccurate data for pension administration can lead to members or beneficiaries receiving incorrect pension benefits, which increases the risk to the employer administering the plan.
- More jurisdictions are requiring that pension plan administrators provide periodic statements to inactive members:
- Quebec has required annual pensioner and deferred vested member statements for a number of years;
- beginning in 2015, annual statements must be provided to Alberta pensioners, and in 2016 to British Columbia pensioners; and
- Ontario and federal pension rules require pensioner and deferred vested member statements beginning in 2017.
- There’s an increased focus by auditors on the accuracy of membership data, whether for purposes of auditing the pension plan financial statements or the pension disclosure information prepared for the employer’s corporate books.
- CAPSA guidelines and the Financial Services Commission of Ontario (FSCO) Policy A300-200 refer to the importance of records management and retention policies in meeting the administrator’s standard of care and protecting the integrity and accuracy of the information that’s used in the administration of the pension plan and pension fund.
- Obtaining timely information and supporting documentation regarding changes in marital status or beneficiary designation can help to avoid potential disputes or payment delays following the death or retirement of a former plan member. Accurate data also help to protect against invalid benefit claims.
- A number of employers have decided to offer existing deferred vested members a one-time opportunity to transfer the lump sum commuted value of their pension from the pension plan, in lieu of receiving a monthly pension from the plan upon retirement. In addition to reducing the investment, interest rate, and longevity risk in the pension plan, a lump sum commuted value program can result in considerable savings in future administrative costs for the employer.
- An approach to reduce pension risk that’s gaining popularity is the purchase of a group annuity in respect of all or a portion of a pension plan’s retiree (and in some cases deferred vested member) obligations. Clean membership data should be provided to insurance companies in order to enable them to calculate an appropriate premium for taking on the obligation to pay the pensions of the inactive plan members.
- A “survivor data audit” can also result in a reduction in the liabilities of a pension plan calculated by the plan actuary. While the reduction in liabilities will depend on the specific characteristics of a particular pension plan, we have seen reductions in retiree liabilities of 1% to 2% in a number of cases and a reduction of 4.5% for one employer.
- Addressing data deficiencies becomes more difficult with the passage of time. A deferred vested member may change addresses multiple times without advising the former employer, which makes locating the member in the future in order to commence their pension more challenging. Also, over time the individuals involved in the day-to-day administration of a pension plan will change. When changes to pension administration staff occur, the identification and rectification of historical data issues become more difficult.
- Quebec has recently started to fine pension administrators who do not locate their deferred vested members and commence their pensions by the end of the year in which they turn 71. An administrator with up-to-date records will be able to avoid these fines.
Administrators will want clean inactive membership data and up-to-date addresses for purposes of these inactive member statements.
Accurate data are needed to re-calculate the commuted value of a deferred vested member’s pension in order to make the lump offer. Also, a successful lump sum commuted value program requires that the employer has a current address on file for the vast majority of deferred vested members. Firms are available that can assist with searching for the address of deferred vested members who can’t be easily located.
For example, pension laws require a pension plan member who has a spouse at the time of retirement to elect a form of pension that provides a survivor pension to the spouse upon the member’s death, except where the spouse waives this entitlement, where applicable. In the case of a retiree, the administrator may not know with certainty whether or not the retiree’s spouse is still alive today. If an administrator purchases a group annuity without conducting a “survivor data audit” to confirm whether the spouses of current retirees are still alive, it faces the prospect of paying the insurer a premium for survivor pensions in respect of spouses who will never receive a survivor pension because they are already deceased (i.e., the administrator will likely overpay for the group annuity due to reliance on outdated administration data).
While the state of a pension plan’s membership data may not be the most glamorous area of focus for an employer administering a pension plan, these data affect most aspects of pension plan management, including administration, the measuring of plan liabilities, and de-risking activities. Given the importance of maintaining clean data and the fact that addressing data deficiencies becomes more difficult with the passage of time, a “sooner-rather-than-later” mindset should drive decisions regarding the timing and level of priority assigned to data cleanup activities.
Simply put, maintaining clean membership data is an important component of good pension governance.