The Incentive Exercises Monitoring Board (the “Board”) this week released the second version of its Code of Good Practice (“V2”). The substantive changes to V2 are limited but nevertheless worth noting. V2 applies in largely the same way as the original version (“V1”), except that trustees are now expressly (rather than impliedly) included as potential initiators of Incentive Exercise (“IE”) offers.

In terms of scope, V2 still applies to both Transfer Exercises and Modification Exercises, which have now been extended to include Full Commutation exercises. Furthermore, additional Boundary examples have been introduced to supplement the terms of V2, by giving guidance on borderline cases (but stresses that the full facts and circumstances of every case should always be considered). A provision has also been included which expressly excludes V2’s application to most wind-up scenarios, but advises all parties nevertheless have regard to V2 where appropriate. Conversely, the Practitioner’s Notes released alongside V1 have not been renewed, and will thus be applicable to only a limited number of cases.

V2 Continues to be constructed of 7 key principles as follows:

  1. No Cash Incentives offered which are contingent on the member’s acceptance;
  2. Advice provided for Transfer Exercises, and Advice provided or a Value Requirement complied with, accompanied by IE Guidance, for Modification Exercises;
  3. Clear, unbiased and straightforward communications with members;
  4. Records to be retained;
  5. Sufficient time allowed and no undue pressure on members;
  6. IEs offered to members over 80 on an “opt-in” basis only. Member Advisers (“MAs”) to comply with a Vulnerable Client policy; and
  7. All parties to be fully informed of roles and responsibilities and to act in good faith.

The amendments to Principle 2 above are the most notable. V2 now contains an additional requirement for MAs to:

“consider the implications of the (IE) offer on other parties, for example the spouse and other beneficiaries of the member, and advise the member (and as appropriate the other parties) on those implications.”

Under V2 this principle also introduces an extra comparison column on its “key points to consider” table, which allows the user to compare how these provisions differ from the DC Guidance Guarantee offered by Pension Wise.

Finally, Principle 2 now also introduces a Proportionality Threshold which softens the Advice and IE Guidance requirements, reducing the offer initiator’s burden, yet still allowing for further advice or guidance to be provided if the circumstances so require. The other key principles remain largely unchanged.

Several definitions in the Glossary have been added or amended in V2, including the following:

  • “Full Commutation” has been defined to coincide with its inclusion in Modification Exercises.
  • “Guidance” has become “IE Guidance” and now specifically relates to member guidance.
  • A “Proportionality Threshold” definition is now included, as above, and sets out when it will apply in each case.
  • “Total Pensions Increase Exchange” has been extended to cover so called flexible retirement offers.
  • “Transfer Exercises” now specifically include exercises which offer the conversion of safeguarded DB rights into flexible DC benefits.

Additionally, the Board has now been confirmed as V1’s proposed “Monitoring Body” and will own, maintain and monitor V2 and its usage. The Board will also review and amend the Boundary examples from time to time. The complaints procedure under V2 remains the same.

With regards the Boundary examples, V2 is generally said to apply where an offer is time-limited and in which case, the employer or trustees are likely to be obliged to pay for any advice given to the member. Where offers constitute open-ended access to ongoing offers, the code is less likely to apply but in most scenarios, trustees and employers are encouraged to adopt the principles of V2 in any event.

The Boundary examples also offer a useful summary of V2’s requirements in terms of Financial Adviser costs, the main provision being that remuneration should not be awarded where it is in any way related to “take-up rates”.

Finally the Boundary examples provide guidance on the application of the Proportionality Threshold in the current environment, stipulating that although the requirements for Advice and IE Guidance under Principle 2 are softened where the Proportionality Threshold applies, in the current environment it would be advisable for employers or trustees to pay for Advice to members in any event.

For more detail on any of the above please click on this link.