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A matter of timing (segregated funds)

Policy

Mr. and Mrs. D. each purchased a segregated fund investment for a 10 year term. The principal amounts invested were 100% guaranteed if held to maturity.

The investments were placed in Registered Retirement Savings Plans (RRSPs) and therefore governed by the terms of the federal Income Tax Act (“the Act”) pertaining to those investments. The Act requires that an annual minimum withdrawal be made from the RRSP from the date the consumer attains 71 years of age. This annual minimum payment is known as a “RIF Payment.”

The consumers retained their investments until maturity. Several months later, they contacted OLHI alleging they had not received the full guaranteed amounts because their insurer had taken their annual RIF payments immediately prior to maturity, contrary to their instructions. The complaints were escalated to an OLHI OmbudService Officer (OSO) to obtain further information. He obtained copies of the relevant contracts from the insurer and undertook research into the RRSP provisions of the Act. He also spoke to both the insurer and the consumers.

The insurer acknowledged that there had been a reduction in the guaranteed amounts paid to the consumers. However, it believed the Act required it to take the annual RIF payment prior to maturity. It also relied on provisions in its contract which stated that any withdrawals prior to maturity resulted in a proportional reduction of the guarantee based on the current market value.

When our Officer spoke with the consumers, he learned that they had instructed the insurer to transfer the entire guaranteed amounts at maturity to another financial institution and to pay their annual RIF payments after maturity. These instructions, if followed, would have resulted in the consumers retaining an additional $5,000. The insurer did not reply to these instructions. The couple found out that the RIF payments had been taken prior to maturity only when they received their final investment statements. This prompted an immediate complaint to the insurer.

Thereafter, our OSO attempted to reach a settlement between the parties. He pointed out that the Act does not require withdrawal of the annual RIF payment prior to maturity of the investments. The insurer, however, contended that its contract required it to do so. OLHI believed that the insurer’s contract was unclear on this key issue. A settlement was not reached and the complaints were transferred to OLHI’s Senior Adjudicative Officer.

In accordance with OLHI’s complaints procedures, our Adjudicator reviewed all documents and interviewed the parties. She then delivered a written report containing findings and non-binding recommendations.

She concluded that Mr. and Mrs. D. purchased the segregated funds because they were guaranteed investments. They also knew it was not in their interest to take out any money before the maturity date and no withdrawals were made, except the minimum annual RIF payments from age 71 onwards.

The Adjudicator found that it was not appropriate for the insurer to take Mrs. D.’s annual RIF payment before maturity. By contract, Mrs. D. had elected this annual payment to be made 9 months later and, in all prior years, the insurer had made the RIF payments during the agreed month. She concluded that Mrs. D. was entitled to the full guarantee amount and recommended that the insurer pay the shortfall.

However, in the case of Mr. D., the chosen date for his annual RIF payment was two months before the maturity date of his investment. The insurer had not taken this annual withdrawal by the date the investment matured. It was therefore appropriate for it to take the annual RIF payment at maturity, and to reduce the guaranteed amount proportionally as per the contract, as this adjustment in the guaranteed amount should have occurred two months earlier. Accordingly, no compensation was recommended.

The insurer promptly agreed to comply with the Adjudicator’s non-binding recommendations and paid Mrs. D. the shortfall amount. Although he was disappointed not to receive any compensation, Mr. D. also accepted the recommendations of the Adjudicator.

Disclaimer: Names, places and facts have been modified in order to protect the privacy of the parties involved. This case study is for illustration purposes only. Each complaint OLHI reviews contains different facts and contract wording may vary. As a result, the application of the principles expressed here may lead to different results in different cases.