MetLife's misplaced-pensioner issue sparks new state queries

Thursday , February 15, 2018 - 10:40 AM

Katherine Chiglinsky and Neil Weinberg

(c) 2018, Bloomberg.

MetLife provided new details this week about how it lost track of thousands of pension clients. But state and federal inquiries promise to drag on for months and will make it hard to put the scandal behind it any time soon.

The company scaled back its assessment of the problem on Tuesday, saying it had inappropriately lost track of 2 percent of the pension clients, or about 13,500 individuals, in the affected business unit. In December, MetLife said the issue could affect less than 5 percent of those clients.

Still, the update means MetLife has failed to pay pensions to two out of every 100 people in the program. Specifically, the company had given up after just two attempts to locate pensioners. The business problem, which it said began 25 years ago, is part of a unit that takes on pension obligations from employers who no longer want to manage them.

It is raising alarms among state and federal officials. The company has received inquiries from a number of state insurance and financial regulators, according to a person familiar with the matter. In response to a query, the Illinois Department of Insurance said it “is aware of the issue and is addressing it.”

MetLife has said that after it became aware of problems in that business late last year, it alerted the New York Department of Financial Services, its primary state regulator, which is examining the issue. It also indicated this week that an inquiry by the Securities and Exchange Commission’s enforcement division has turned into a formal agency investigation. William Galvin, the Massachusetts Secretary of the Commonwealth, announced a separate probe in December.

“Our office has a long history of locating lost assets for people in Massachusetts and our goal is to find residents who have not received their retirement assets and make sure they are fully compensated,” Galvin’s office said in response to a query.

“This was not our finest hour,” MetLife Chief Executive Officer Steven Kandarian said during a call Wednesday discussing fourth-quarter earnings. “MetLife’s core purpose is providing financial protection to our customers. Central to that purpose is the timely payment of benefits, which makes this issue especially distressing to me. I am deeply disappointed.”

Kandarian’s disappointment is understandable. He’s the former executive director of the Pension Benefit Guaranty Corp., a federal agency that guarantees the pensions of 40 million individuals.

The insurer is trying new strategies, including phoning clients and using certified mail to make sure it’s reaching them, Chief Financial Officer John Hele said Thursday at a conference.

“We phone people now,” Hele said. “Some older people pick up the phone. They may not read their mail. That’s working pretty well actually,” he said, adding that other new efforts include using the internet and certified mail.

Pension risk-transfer deals have grown in popularity in the U.S. as employers grapple with the rising costs of retirement plans, especially in an era of low interest rates. Prudential Financial has taken on pension obligations of companies including General Motors and Verizon Communications.

The troubles at MetLife underscore one of the challenges inherent in a business where employers have unloaded more than $86 billion in pension obligations over the last five years. It can be tough enough for employers to keep track of beneficiaries over years or decades as they change jobs and move. It’s all the more fraught when obligations are shifted to insurers -- often requiring employers to clean up data files or convert them to an electronic format, according to a 2016 report from Prudential.

At MetLife, the challenges were compounded by the fact that some of its risk-transfer business was written as much as 25 years ago and involved many participants who were still years from retiring and collecting pensions. With no hard-and-fast regulations governing how insurers track clients, MetLife followed a policy of attempting to reach beneficiaries twice -- once when they approached 65 and again about 5 1/2 years later, when they were required under federal law to begin drawing benefits.

If both attempts failed, MetLife would assume a customer wouldn’t respond. The company then released the funds it had held to pay the pension from its reserves.

MetLife would welcome additional guidance from regulators related to the risk-transfer market, company spokesman Randy Clerihue said.

On Wednesday, MetLife said it’s shifted focus to buying pension plans from employers in which beneficiaries are already retired. The insurer acquired a record $3.3 billion of pension obligations last year and expects 2018 to be another active year, CFO Hele said.

MetLife said it found problems with its past practices itself, citing a “lack of timely escalation” of the issue. Last October, the discovery was brought to the attention of Kandarian and Michel Khalaf, who took over the U.S. business three months earlier, the CEO said during Wednesday’s call.

“Some uncertainty remains around the issue, given ongoing investigations by the NY state regulator and the SEC,” Mark Dwelle, an analyst at RBC Capital Markets, told clients in a note on Wednesday.

The troubles have prompted analysts to question other companies in the risk-transfer market. Prudential said earlier this month that it’s comfortable with its practices and the money backing the contracts.

This isn’t the first time insurers have been admonished for not doing enough to reach clients. In recent years, MetLife and others came under scrutiny from regulators who accused them of holding on to benefits people hadn’t claimed, rather than turning them over to states or policyholders. Many insurers now use a government database known as the “Death Master File” to double-check whether clients are still alive.

MetLife also indicated this week that it will attempt to contact annuitants more frequently and hire third parties to conduct a comprehensive examination led by its chief risk officer.

“Finding and locating policyholders is nothing new to these companies,” said Jukka Lipponen, president of Independent Insurance Analysts.

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