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26 / 01 / 2024
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Preventing overpayments when members die – adopting a proactive approach
Managing bereavements sensitively is critical for well-run pension schemes. But what happens if a member dies, and the pension scheme isn’t notified or there’s a delay in notification?
Overpayment of benefits after a member dies is more common than you may think and as well as the overpayment itself, can result in significant additional costs and complexity. These issues can be avoided, and millions of pounds of savings made with a more proactive approach.
What can pension schemes do to avoid overpayments?
Maintain the status quo
Pension schemes could continue to rely on their existing processes. A member’s estate would generally be expected to inform the pension scheme of a member’s death and this would capture the majority of cases. For the remainder, there are other processes to capture a member has died. For example, banks would typically close bank accounts for someone who has died which would result in pension payments bouncing and similarly mail may be returned if the recipient is no longer living at that address.
However, these types of notifications are not robust. If a bank account was a joint account, then the bank account would be transferred to the other account holder, not closed. Similarly, letters do not have to be returned to sender and pension schemes typically do not frequently send letters to their pensioners.
Ask members directly
Pension schemes could regularly write to all pensioners to proactively check they are still living at the address held on record. This has significant expense in print and postage, is subject to misinterpretation by the member, manual error and requires significant resources to process the results.
Additionally, if these write-out exercises are carried out every three years for example, then identifying a member has died in this way would mean a typical overpayment of 1.5 years of pension.
Independently check
Investing in technology is now commercially attractive. Using an independent tracing agent, a pension scheme could check their membership against the agent’s extensive databases, which would include the UK death register, to verify if the member is living at the address held.
As the results could be obtained via automated feeds, any changes could be uploaded to the pension scheme database directly, eliminating human error, and reducing member and administrator effort.
From a commercial perspective, it now costs less to run an electronic check for a member against the death register every month, than to send a letter to the member once a year – ignoring the effort from the member to complete any forms or the administrator to input the information to the pension scheme database.
Additionally, the monthly check would significantly reduce the time taken to proactively identify a member has died, from 1.5 years, where a pension scheme would typically write out once every 3 years, to a just over a month, in our experience. We expect further improvements as this technology is enhanced.
When to stop pensions?
Pensions should only be paid while the member is still alive. Pension schemes typically pay pensions until the end of the month the member dies, as that is administratively easier. This is in addition to the spouse’s pension starting from the day after a member passes away.
So, if a member with a surviving spouse dies on 1 September, a full month’s member pension is paid in September, no member pension would be paid from October and a spouse pension would also be payable from 2 September.
If a member dies on 30 September, a full month’s pension is paid in September, no pension paid in October and a spouse pension would be payable from 1 October.
In the first example, if the bank account was a joint account, the spouse would effectively receive both a member and a spouse’s pension from 2 September to 30 September. Whilst, in the second example there is no overlap between the member and spouse’s pension.
What’s right?
Paying to the end of the month could be perceived as inherently unfair, benefiting the estate of members who die at the beginning of the month, relative to the rest of the membership. This is likely to be against the spirit of the pension scheme provisions.
However, making a change to stop pensions on the day a member died would need careful consideration.
Why make a change?
By changing to paying pensions until the day a member dies, pension payments are stopped earlier. This can save schemes significant sums in additional overpayments that either don’t arise in the first place or can be recovered, often exponentially more than the additional costs involved if robust automated processes are put in place. It also removes the unfairness associated with paying benefits for a different duration depending on whether a member passes away earlier or later in the month.
While there are clear benefits to the pension scheme, there are two barriers to consider in addition to those already highlighted.
1. Roles and Responsibilities
Generally, pension scheme administration agreements are not incentivising this change with typical administration contracts measuring performance solely by speed of service. This change would certainly increase the casework for the scheme administrators with benefits being realised for the pension scheme, not the administrator.
This may need a mindset or culture change and in many cases revisiting contracts to move away from solely time-based measures and more outcome-focussed measures for members and schemes.
2. Member or next of kin satisfaction
There is a risk that stopping pensions earlier and recovering more money would trigger more complaints or risk damaging the reputation of the pension scheme.
However, if the overpayment is explained clearly, in a timely manner and with sensitivity, from experience the executor of the estate is typically very understanding and cooperative.
It is also worth asking that if it’s morally right to stop pension at the day of death, is there a reputational risk for not making a change?
Ultimately, it’s up to the pension scheme trustees and administrators to decide whether to proactive identify members who have died and the best way to do this.
But with more options now available and saving potentially running into millions of pounds, it may be worth considering the benefits of a change of approach.
If you’d like to know more, get in touch at: hello@brightwellpensions.com
