In June 2012 a new voluntary Code of Practice was issued by an Industry Working Group set up with the aim of ensuring that incentive exercises are undertaken in line with good practice. The new Code is much more detailed than the Pensions Regulator’s December 2010 guidance on this subject.

In response, over the summer the Regulator withdrew its guidance and replaced it with a short principles based statement aimed at trustees and insurers, as well as employers and their advisers.

What are incentive exercises?

Incentive exercises are targeted at members with defined benefits in trust-based occupational pension schemes. They commonly involve approaching members and asking them to transfer out their accrued benefits to a personal pension arrangement or other investment product offered by an insurance company, such as an annuity or income drawdown product. In the Code these are referred to as ‘transfer exercises’. Alternatively, members may be encouraged, for example, to give up their future rights to pension increases. These are referred to in the Code as ‘modification exercises’.

In all cases incentives are offered to encourage members to take part in the exercise, the aim being to de-risk the defined benefit scheme by reducing its liabilities.

Code of Practice: 7 Principles

The Code has 7 principles which should be followed:

  1. No cash incentives.
  2. Individual financial advice required for all transfer exercises. For modification exercises, whether advice should be provided depends on whether a ‘value requirement’ (the detail is in the Code) has been met. The cost of providing advice should be met by the person making the offer.
  3. Communications with members should be fair, clear, unbiased and straightforward.
  4. Records should be kept providing an audit trail.
  5. Members should be allowed sufficient time to make up their minds, with no undue pressure applied.
  6. Incentive exercises should only be offered to members who are over age 80 on an “opt in” basis. Those providing advice or guidance to members should adhere to a vulnerable client policy.
  7. All parties involved in an incentive exercise should be aware of their respective roles and responsibilities and act in good faith in the areas over which they have direct control.

Voluntary code

The Code is voluntary. However, the fact that the Code was, or was not, followed will be taken into account by the Pensions Ombudsman and the Financial Services Ombudsman when considering an incentive exercise complaint.

Pensions Regulator’s July 2012 statement

The Pensions Regulator reiterated its long-held views of incentive exercises namely that “trustees should start from the presumption that incentive exercises are not in members’ interests”.

Where an incentive exercise is brought to the Pensions Regulator’s attention, it will take into consideration the trustees’ involvement and, if appropriate, require an investigation to be made into the general administration and governance of the scheme concerned.


There is a great deal of detail in the voluntary Code of Practice, with a useful glossary for those who are not familiar with some of the terminology. Whether a voluntary Code will work will depend on whether employers and their advisers are willing to follow both the letter, and spirit, of the Code.

Action Needed

If you are an employer, pension adviser, trustee, insurer or financial adviser in relation to an incentive exercise, you will be expected to have read, understood and followed the Code’s principles. If you choose not to do so either generally or in relation to a particular aspect of your incentive exercise, you would be well advised to document your reasons.

Useful Information

To read the Code and the Practitioner Notes go to: