With more Canadians expected to retire overseas, pension plan administrators need to be prepared
The next decade will see an unprecedented number of retiring Canadians. Many will decide to live abroad, lured by more moderate climates and, often, greater dollar-for-dollar spending power. Some will choose to live overseas year-round, while the snowbirds will spend only the colder months of the year in more temperate weather. Whatever the case, the growing trend of retiring abroad will mean additional issues for plan administrators when it comes to the pension payment process.
Some of these issues include complicated and often-changing overseas bank instructions; additional inquiries from pensioners regarding missing or late payments; unexpected and/or proportionally large fees and unfavourable exchange rates; and returned or misapplied international payments. When a retiree ventures to a country with a less-secure financial infrastructure, confirming the authenticity of the receiving party becomes yet another concern. Here are four tips for pension plan administrators to manage these issues.
1) Send local currency instead of Canadian dollars. The vast majority of overseas pensioners opt to open local foreign bank accounts. Sending Canadian dollars to foreign countries creates a number of issues, including delays in applying payments, unfavourable foreign exchange rates and high transmission fees.
2) Automate international payments. When the number of international payments handled by pension managers increases and the process is manual, this can result in inefficiencies. Payments can often be routed using local clearing methods, reducing or eliminating high international wire charges or intermediary bank charges.
3) Ensure that only entitled beneficiaries receive pensions. In 2010, the U.K. Department for Work and Pensions identified 9,000 pension beneficiaries living abroad who were still receiving a monthly state pension when, in fact, they had passed away—a loss of approximately C$64 million (£35 million) that year alone. (In Canada, there are no aggregate numbers on a national level, since the provinces pay most benefits and each province measures welfare fraud differently.) Designing and implementing an in-house control process can help to ensure that only entitled beneficiaries receive payments. For example, the identities of beneficiaries living overseas can be checked and updated annually to ensure that communications are sent directly to the correct individual. The right process should lead to a reduction in fraudulent payments, resulting in lower costs.
4) Be prepared for foreign currency exposures. When retirees choose to live in different countries outside of Canada—as far flung as Costa Rica, Malaysia or Panama—the foreign currency exposures that pension funds need to manage become increasingly complex. Fluctuating currency markets can mean unfavourable exchange rates for payees, as well as for the pension fund itself. Pension funds can reduce the risk of currency fluctuation by learning where the risks lie and then working with money managers to find a currency hedging solution to manage them more effectively.
Sending pension payments around the globe can be challenging for pension funds, so it would be prudent for plan administrators to establish a payment strategy. The right approach can help to prevent fraud, reduce costs and enhance reconciliation processes.
Reverse Migration
❱❱ It’s not only Canadian-born retirees who choose to leave Canada at retirement. Immigrants to Canada also migrate, often returning to their country of origin. For example, 71% of people who lived in Canada in 2000 but were living in Italy by 2001 were born in Italy, and more than half (52%) of these returning migrants were over age 50. Source: 2000 census data from Italy
Roy Farah is the head of corporate business for Western Union Business Solutions in Canada.
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