Overpayment of pension benefits due to annuitant deaths may require additional plan contributions from a sponsor. However, a continuous death audit can help sponsors learn of annuitant deaths early, preventing unnecessary disbursements of funds. In his article “Advantages of a continuous death audit,” Milliman’s Justin Guy discusses the benefits of working with a certified search firm to report on annuitant deaths.
Here is an excerpt:
For some plan sponsors, Milliman has partnered with a certified search firm in order to continuously monitor two distinct populations. Both annuitants and deferred vested participants are monitored on a weekly basis for mortality verification purposes.
Why deferred vesteds? If these participants are not in pay, there is no risk of overpayment, so why monitor this population? The answer has roots in de-risking. If a terminated vested participant dies, the liability to the plan could be removed if that participant is not entitled to a death benefit based on marital status or other applicable plan provisions. In addition, contacting any beneficiary in as timely a fashion as possible will reduce the administrative burden of trying to locate beneficiaries years later before they become lost.
To illustrate the impact of prompt notification of a death for an annuitant, consider the following:
• Administrator conducts annual death audit on July 1.
• Annuitant dies on July 25, 2014.
• Death is not reported by estate.
• Annuitant has EFT.
• Annuitant is receiving a single life annuity of $500.
In this example, an overpayment for the months of August 2014 through July 2015 is likely, totaling $6,000 due to the timing of the audit and trust cut-off calendars. If the death is reported on the public DMF, which Milliman monitors weekly, only the August overpayment is inevitable. Therefore, $5,500 in overpayments would be prevented.
Although we have seen a 70% successful rate of recoupment, this is across the entire plan. It is much more likely to recoup $500 dollars from an estate than $6,000. Also, if identified early enough, it may be possible to recall the EFT without funds being lost from the plan at all!
In real-life administrative activities, a total of 149 annuitants became deceased between July 15, 2013, and August 1, 2013, for the same population Milliman supports.
Overall, the cost of administering these activities is far less than the cost of a single overpayment that is unsuccessfully returned. Milliman can achieve even higher savings due to a per-record fee structure. The more records searched, the lower the cost per record.