An incentive exercise is where an employer connected to a defined benefit (DB) scheme seeks to reduce risk or cost associated with the DB scheme by offering members the option to transfer out of the scheme or modify their benefits.

A Code of Good Practice for Incentive Exercise (Code) was written by the industry and first launched in June 2012 in response to industry and government concerns that such exercises could be conducted in a way that disadvantaged pension scheme members. It covered the types of transfer that the Code would apply to and presented seven key principles as guidance.

Revised Code of Practice

Following a review, the Incentive Exercises Monitoring Board (IEMB) has published the second version of the Code to help the pensions industry better understand the Code. 

IEMB chair Margaret Snowdon said the board concluded that there was no need to change the principles of the Code and that ‘change or withdrawal of those principles could risk a decline in good practice’. Therefore, updating the body of the Code would be enough to reflect the changing environment since 2012, most notably the pension freedoms introduced in 2015. Boundary examples have also been introduced to help illustrate how the Code could and should be applied in practice.

The IEMB board also discussed whether or not winding up lump sums (WULS) should be covered by the Code as the board could ‘foresee the growth of them being used as incentive exercises’. The board will therefore consult with the industry during 2016 on whether or not IEMB should be specific about which types of WULS should fall within the Code.

Pensions minister Ros Altmann commented: ‘I welcome the publication of this code which sets challenging, but realistic, standards that will help deliver high quality incentive exercises. Both employers and advisors should look to this code to share best practice and help them to deliver value to the consumer.’

Please see the Code - 2015 Review of the Code for further information.