A Revised Code of Good Practice on Incentive Exercises has been published which applies to any offers made after 1 February 2016. There are a number of key changes to be aware of.

Background

In June 2012, a group of industry bodies published a voluntary code of good practice for dealing with incentive exercises. In July 2012, the original version of the Code of Practice on Incentive Exercises was published (the OriginalCode). The Original Code set out seven principles that the bodies urged employers and trustees to comply with when members are offered incentives to transfer out of their employer's Defined Benefit scheme or agree to a modification of their existing benefits (for example, by giving up non-statutory pension increases).

On 1 February 2016, the Incentive Exercises Monitoring Board (IEMB) published a Revised Code of Good Practice on Incentive Exercises (the Revised Code). The Revised Code applies to offers made on or after 1 February 2016 only.

Broadly, the Revised Code deals with two types of incentive exercises:

  • Transfer Exercises, which involve an offer to members to transfer out their Defined Benefit rights. These include enhanced transfer value exercises (where members are offered a financial incentive to transfer their benefits out of the scheme) and total pension increase exchange exercises (which involve an enhancement to pension income in return for surrendering all or part of future pension increases) (and variants thereof).
  • Modification Exercises, which involve full commutation exercises (where a cash lump sum is offered in full replacement for a pension that would otherwise have been available) and pension increase exchange exercises.

Key changes to note

There are a few key changes and amendments to note, including:

  1. The scope of modification exercises has been amended to cover full commutation exercises. This change reflects an announcement made by the IEMB in January 2015 in the lead-up to the introduction of the DC pension flexibility reforms.
  2. The Revised Code clarifies that whilst incentive exercises are typically started by the employer, on occasion they might be initiated by another party, such as the trustees. The party who initiates the offer is not only responsible for following the Revised Code (and seeking to ensure that other parties also do so) but “should” also pay for any financial advice and associated services, such as helplines. The Original Code said advice would "typically" be paid for by the employer.
  3. When giving advice to a member about an incentive exercise, the adviser must now consider the implications of the offer for the member’s spouse and other beneficiaries and advise the member on those implications.
  4. A new proportionality threshold has been introduced, meaning that the advice or guidance requirements are relaxed if a member is being offered a transfer value worth £10,000 or less, a cash commutation of £10,000 or less or, in the case of a pension increase exchange, a modification to a pension worth £500 a year or less. Where an offer is below this threshold, the Revised Code is modified so there is no requirement to offer advice or guidance before an offer is accepted. However, guidance should be made available and be "readily accessible" to members. Further, the parties may wish to consider whether it would be good practice to provide further financial advice or guidance, based on their knowledge and experience of the membership.
  5. The Practitioners’ Notes were published alongside the Original Code and remain available to users. However, these have not been reviewed as part of the Revised Code and are not being maintained in the future. Rather than update the Practitioner Notes which supported the Original Code, the IEMB has introduced “Boundary Examples”. These aim to help illustrate how the Revised Code could and should be applied in practice. The examples fall into four areas:
  • Situations which may fall within / outside the scope of the Revised Code, particularly considering “business as usual” situations. To fall outside of the scope of the Code, IEMB would expect the “business as usual” not to be time limited, include consistent terms, enable access to financial advice as offered in a “business as usual” context, and contain consistent communications.
  • Backdating of pension increases exchange exercises is in line with the Revised Code if there is a clear administrative benefit from the proposal. Without this clear benefit, backdating would be considered as a cash incentive which does not comply with the Revised Code.
  • IFA fee structures should be “tailored to the individual and their circumstances as a whole including consideration of all materially relevant factors known after reasonable enquires” and the party making the offer should pay for the advice and associated services.
  • For Transfer Exercises less than £10,000, the “Advice” principle of the Revised Code is softened, and the Revised Code only requires that incentive exercises guidance is made available to members. In practice, it may still be prudent to offer to pay for advice for members who have a transfer of less than £10,000 if they are included in a Transfer Exercise.

Whilst the Revised Code is not intended to apply to incentive exercises undertaken during a scheme's winding-up, the IEMB plans to consult during 2016 on whether the payment of a winding-up lump sum should fall within the scope of the Revised Code. For the time being, the Revised Code states that even though the payment of a winding-up lump sum is outside the current scope, "all parties should be mindful of the principles of the Code in such circumstances to ensure that members' interests are appropriately protected".