Mduduzi Luthuli - Luthuli Capital (Pty) Ltd
Dear reader, what you are referring to is known as ‘miscalculation or plan error’ and defined as follows: The plan or third-party administrator inaccurately calculates a participant’s benefits or otherwise misapplies the provisions of the plan, resulting in too high a benefit being paid to participant.
Miscalculation of your annuity income although not common, does occur and is an unfortunate event to have to deal with as you’re reliant on this income to sustain your quality of life. Unfortunately, the question does not give enough detail to answer you thoroughly or speak to your specific circumstances. I’ll have to assume you’re referring to a life annuity and are referring to the inception rate. Please consult with a wealth manager, disclose the full details of your case for a proper answer.
Based on the hypothetical scenario that you have given me and my experience within the financial advisory field, it has been my experience that if a quote is issued with an incorrect rate and the lump-sum retirement value to be used to fund the annuity income is received, payment has started and the error is only picked up at anniversary, the issuer can (and will) institute recovery procedures to recover their funds directly from the client. They are entitled to recover the overpayment. There are various arguments the issuer can make. Below are a few arguments I’ve encountered over the years in such cases.
The issuer can argue that the miscalculation was a ‘bona fide mistake’ and therefore you as its client cannot keep the money that was not due to you. The issuer will most likely state that you should also have been aware that the amount that was offered could not be correct and you also hold some responsibility on ensuring the offer presented is correct. They will most likely state that you have suffered no prejudice but in fact benefited by being enriched by the error. The issuer will try to justify recoupment actions by claiming that the annuity plan has a fiduciary duty to collect overpayments on behalf of all other participants of the plan.
The idea is that overpaid amounts are plan assets that belong to participants of the plan. Currently, pension/annuity plans write their own rules (although are guided by and must adhere to the Pension Funds Act) on how they go about collecting money they negligently paid out. Typical recoupment schemes place the entire burden of repayment on retirees even when plan negligence causes the overpayment error and the overpaid amount is negligible when compared to the loss of income amount for the retiree.
They will most likely try to resolve the matter amicably through an alternative offer that seeks to reduce the future monthly income amounts that have been annuitised to reflect the correct value of the remainder capital. In most cases, they (the issuer) are not allowed to take this due amount from the capital value of the contract. You as the client are not powerless in this situation and don’t have to accept their repayment terms as is, but you will however have to prove that the new offer made meets one of or more of the following conditions: –
- It caused you to suffer negative prejudice as you would suffer a financial loss due to the error.
- The issuer acted negligently in making the miscalculation
- The issuer acted unlawfully in making the miscalculation
This will not be an easy task. That’s just the truth and is not stated to discourage you from taking further action against the issuer. Essentially your task is to prove the issuer has weak or non-existent administrative checks and balances and that the issuer has failed to comply with the principles of good governance … which provide, inter alia, that communication to members should be appropriate, accurate, complete, useful and comprehensive. There are cases stating that miscalculation of retirement benefits is a breach of fiduciary duty because of a failure to follow the terms of the plan. So, what are your options? What must you do? Who is wrong here?
The recoupment problem is a difficult situation for both the issuer and participants. The issuer must balance their duty to an individual participant with the plans’ duty to all participants. However, retirees should not be subject to unexpected and excessive financial burdens because of a plan’s mistake. Retirees should receive the benefits they earned, no more or less, but the repayment process must be equitable. The competing interests at play in an overpayment situation demand accountability and reasonable accommodations on the part of everyone. Plans should be permitted to recoup overpayments, but appropriate limits on the amount of benefits a plan may recoup should be imposed along with a fiduciary’s ability to waive overpayments in situations of financial hardship.
How to protect yourself
It’s not uncommon for some plans to notify retirees that they were overpaid and to start lowering benefits immediately. If this happens to you, consider taking these steps:
- Ask to see the calculations showing how your new benefit amount was determined. Plan administrators miscalculated your payments before and they may be wrong again.
- If you’re unclear about your situation or need help to understand your rights, contact your wealth manager or the Fais Ombudsman.
- Retain plan documents, including benefit statements, notices and your summary plan description and start collating documents that prove past payments already issued.
As a client, should you feel that your rights have been prejudiced, or you have been aggrieved in any manner, you have the right to lodge a complaint. Should you wish to pursue a complaint against a key individual a representative or an institution, you should address the complaint in writing. If you cannot settle your complaint directly with the applicable party, you are entitled to refer it to the office of the Fais Ombud. The ombud has been created to provide you with a redress mechanism for any inappropriate financial advice that you feel may have been given to you by a financial services provider.
I hope the above answer gives you some context regarding such a situation and assists you in rectifying this matter.
Mduduzi Luthuli is head of wealth management at Luthuli Capital.
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