Incentive exercises have been widely used by employers as a way of reducing pension liabilities. In 2012 a voluntary industry code was introduced as a guide to best practice in this area. Now an updated version of the Code has been produced which covers incentive exercises which are:

  • an invitation or inducement to a member to change their accrued defined benefit rights in a UK registered pension scheme;
  • where one of the objectives of doing so is to reduce risk or cost for the pension scheme or the sponsor; and
  • where the invitation/inducement is not ordinarily available to pension scheme members.

Broadly, the Code covers two types of incentive exercises which involve:

  • transfers out from a defined benefit pension scheme (including enhanced transfer value exercises and total pension increase exchange exercises and variations of these); and
  • modifications within defined benefit schemes (e.g. full commutation and pension increase exchange exercises).

The aim of the Code is to help ensure that these incentive exercises can be offered in a responsible manner, enabling members to make informed decisions and better choices in relation to them. The Code suggests that the exercises should satisfy certain criteria e.g. they should be carried out fairly and transparently and be able to achieve high levels of member engagement.

The Code is made up of seven principles to be followed (e.g. there should be no cash incentives that are contingent on the member accepting an offer, and that member communications should be fair, clear, unbiased and straightforward) which is then supplemented by information on how to follow those principles.

The main areas in which the updated Code differs from the previous 2012 version are:

  • that it is made clear that the Code now covers full commutation exercises (where a cash lump sum is offered instead of a pension);
  • in the section on advice that should be provided in certain circumstances, it says that the adviser should ‘consider the implications of the offer on other parties, e.g. the spouse, other beneficiaries of the member, and advise the member (and as appropriate the other parties) on those implications’;
  • there is now a new ‘proportionality threshold’ where broadly, a member is being offered a transfer value or cash commutation (full commutation exercises) of £10,000 or less or in the case of a pension increase exchange exercise, where the pension that can be modified is £500 p.a. or less). If this applies, there is no requirement to provide advice or require that the member must take guidance before the offer can be accepted, though guidance should be made ‘available and readily accessible’ to members who wish to take it. It is also suggested, however, that Code users should in any event consider whether it is good practice to provide or require further advice or guidance depending on their own knowledge and experience of the membership.

The Code is for guidance only and does not constitute legal advice – a fact that the Code itself emphasises. However, as it has been compiled with the input of various industry bodies, the Code could be regarded as a helpful guide to what is considered to be current best practice in the industry and so helpful to employers considering the type of incentive exercises that the Code covers. However, ultimately following it would not give any guarantee that subsequent claims would not arise or indeed that employers could defend those successfully; conversely though, not following it does not mean that any incentive exercise undertaken is automatically unlawful.