Incentive exercises: the Pension Regulator’s view

The industry Code of Good Practice on Incentive Exercises was published in June 2012.  The Regulator has now published a short principles-based statement setting out its approach to incentive exercises.  The statement replaces the Regulator’s December 2010 guidance.   This speedbrief looks at the Regulator’s statement.  Click here to see our speedbrief on the Code of Good Practice.

Incentive exercises: a quick reminder

The Code defines an incentive exercise as an invitation or inducement provided to members to change the form of their accrued defined benefit pension rights which:

  • has as an objective to reduce risk or cost for the pension scheme or sponsors, and
  • is not ordinarily available to members of the pension scheme.

The main types of incentive exercises are enhanced transfer value exercises and pension increase exchanges.

Regulator’s statement

The Regulator’s statement makes it clear that the Regulator supports the Code and that it will have regard to the Code where relevant.  Now that Code is in place, the Regulator considers that its December 2010 guidance can be replaced by a principle-focused statement.

The Regulator reiterates in the statement that, in its view, incentive exercises are not likely to be in the interests of most scheme members (although it does explicitly acknowledge that a minority of members may have personal circumstances which mean that accepting an incentive offer could put them in a better position). Whilst the Code refers to the need for all parties to the exercise to ensure that they are aware of their roles and responsibilities, the statement focuses on the trustees’ role.  The statement also provides that trustees should:

  • approach an exercise cautiously and make sure they understand (and act in accordance with) their legal obligations;
  • fully understand the exercise and its structure as well as how it achieves the level of good practice recommended in the Code;
  • actively engage with the proposal from the start so that members are properly informed and treated fairly;
  • manage conflicts of interest;
  • be aware of and meet their data protection duties;
  • consider the potential implications of the exercise on the strength of the employer’s covenant; and
  • be careful not to advise members where they are not authorised to do so.

As well as the specific guidance for trustees, the statement sets out five principles setting out the minimum standards by which the Regulator expects incentive exercises to be conducted.  These principles are that:

  • an offer should be made in a clear, fair and not misleading way to enable members to understand the implications and made decisions that are right for them.
  • the offer should be open and transparent so that all parties involved are aware of the reasons for the exercise and the interests of the other parties.
  • conflicts of interest should be identified and properly managed in a transparent manner and removed where necessary.
  • trustees should be consulted and engaged from the start of the process, with any concerns arising through the exercise alleviated before progressing; and
  • independent and impartial financial advice should be available to all members.  In particular the offer should be structured so as to require members to take independent financial advice.  Where financial advice is not required (for example pensions increase exercises) detailed guidance should be given instead.

The Regulator also states that it will “investigate reports of cases” where behaviours give it cause for concern.  The kinds of behaviours it has in mind here are offers which advantage one section of the membership over another; attempts to exploit the Pension Protection Fund; and those which adversely  affect the employer’s ability to fund the scheme (presumably because they use up a large amount of the employer’s capital).

The Regulator goes onto make the thinly veiled threat that, if it investigates an incentive exercise, this “may result in a much wider review of the general administration and governance of the scheme”.


It is helpful that the Regulator has produced its statement so soon after the voluntary industry Code was published in June 2012.  It is also helpful that the statement is designed to dovetail with and supplement the Code.

Whilst the Code is addressed to employers, much of the focus of the Regulator’s statement (and its previous guidance) is on the role of the trustees.  Although trustees do not instigate incentive exercises and generally have very little power in relation to them, the Regulator still expects trustees to engage actively in the exercise from the start to ensure that members are properly informed.  The Regulator reiterates its view that trustees should start from the presumption that incentive exercises are not in most members’ interests.

The Regulator lays down a clear marker in the statement that it will look to the information produced by the Code’s monitoring body to make sure that incentive exercises are complying with the Code and the statement.  It is likely that the Regulator will take further action should the Code and guidance not be followed.