A working party of individuals from across the pensions industry, including representatives of the Department for Work and Pensions, has published a code to govern the way that pension incentive exercises are run. Such exercises may constitute the offer of enhanced transfer values, generally to deferred members, or the offer of a pension increase exchange, under which a member exchanges non-statutory pension increases for a higher, non-increasing pension. The code’s aim is to increase the level of protection available to members who are offered an incentive to change or transfer their pension rights and to eliminate the poor practices that have been followed in some such exercises in the past.
Inevitably, there were some areas on which agreement could not be reached by such a diverse group of individuals as comprised the working party, so an element of compromise was necessary. The resulting code identifies 7 principles which all incentive exercises should follow in future and these are set out below.
- No cash incentives should be offered that are contingent on the member accepting the offer.
- For transfer exercises advice should be provided to the member. For modification exercises either advice should be provided or a value requirement should be satisfied.
- Communication with members should be fair, clear, unbiassed and straightforward.
- An audit trail should be maintained for future reference and, when providing advice, the Member Adviser should record and report to the other parties on members who act contrary to his advice.
- Members should be given sufficient time to reach a decision with no undue pressure applied.
- Incentive exercises should include members over age 80 only on an “opt-in” basis and Member Adivsers should take account of special treatment that may be needed by those who are vulnerable (through age, health or understanding etc) when providing advice.
- All parties should ensure that they are aware of their roles and responsibilities and act in good faith in the areas where they have direct control.
In the light of the new code, the Pensions Regulator has reviewed its existing guidance on incentive exercises and replaced it with a short principles-based statement on incentive exercises. The “short” statement still runs to 6 pages but focusses more on trustees’ role and the Regulator’s role. Its starting point remains that trustees should regard incentive exercises as not being in members’ interests.