Industry group publishes revised code of practice for on incentive exercises. Employers and trustees should consider the code very carefully in any exercise.
A revised and updated code of good practice has been issued by the industry group, the Incentive Exercises Monitoring Board. The Pensions Regulator supports the code and recommends that employers and their advisers should follow the code in any incentive exercise.
The revised code updates the version previously published in 2012 and while much of it remains the same, and the 7 key principles – see below - still apply, there are some interesting changes:
- while in general it is expected that employers will take the lead on incentive exercises, the code recognises that there are circumstances where trustees may instigate or be actively involved in them.
- full triviality commutation exercises (up to £30,000) will fall within the code but there is then a proportionality threshold that relaxes the requirements where the lump sum is less than £10,000 or the annual pension being affected is less than £500.
There is also some useful guidance on "boundary examples" to define when the code would not apply, including when the option is not time limited, the same option(s) is/are available as part of the normal operation of the scheme, advice is accessible to the same extent as for business as usual (BAU), and the communications are consistent with those for BAU.
The 7 key principles set out in the code are:
- No cash incentives should be offered.
- For transfer exercises advice should be provided, while for modification exercises either advice should be provided or a value requirement should be complied with;
- Communications should be fair, clear, unbiased and straightforward – something which can be quite a challenge when communicating anything to do with defined benefit pensions;
- Records should be kept so that an audit trail is maintained.
- Sufficient time should be allowed and there should be no undue pressure applied to make a decision.
- Incentive exercises should only be offered to members aged 80 or over on an opt in basis. There are special provisions applying to what the code describes as 'Vulnerable Clients'.
- All parties should be aware of their roles and responsibilities and to act in good faith.
The code provides a number of examples and some useful guidance on how to ensure compliance.
Trustees will still have to consider carefully whether they have a role to play in any exercise, although they will usually want, as a minimum, to ensure that members are fully and properly informed about their existing benefits and options. More and more schemes are moving to providing information about 'at-retirement transfers' as members approach retirement, but what now seems to be happening is that schemes are likely to respond to "member choice" by exploring whether to provide information to members at an earlier date, e.g. as they approach age 55. And some schemes may also extend to include pension increase options as well.
All of this comes with the obvious warnings. While trustees can legitimately take the view that informing members about options is part of their responsibilities, trustees will need to be careful on what they communicate to ensure that they provide information that (to borrow a phrase from the code) is " fair, clear, unbiased and straightforward".