Following rising concern about how transfer incentive exercises have been conducted in the past, the Regulator published its final form guidance on transfer incentives on 9 December 2010. The guidance has changed very little from the draft version that was previously published for consultation purposes.
An inducement exercise involves the employer offering some or all of the scheme members an “incentive” to transfer out their benefits (i.e. something on top of their normal transfer payment – normally an enhanced transfer value, or a cash payment) or to forgo certain pension increases (typically in exchange for a larger, but non-increasing, pension).
- The need for revised guidance
Since issuing initial guidance in January 2007, the Regulator has monitored the development of, and common practices involved with, inducement exercises. The main observation was that employers were taking a “box-ticking” approach and not giving due consideration to the needs of members.
- The Regulator’s “principles”
The guidance sets out the following fives principles:
- information should be clear, fair and not misleading;
- an offer should be open and transparent;
- conflicts of interest should be identified and appropriately managed or removed;
- trustees should be consulted and engaged from the start and their concerns should be
- addressed before the exercise progresses;
- independent financial advice should be made available to affected members.
The Regulator will investigate any behaviour that is outside the spirit of these principles.
- Points to note
The Regulator’s starting point is that any incentive is probably only in the interests of a minority – it therefore advocates a tougher, more proactive, stance to protect members’ benefits that it has done so previously. The key messages are that trustees will be expected to apply a high level of scrutiny in order to protect members’ interests; financial advice will be key to determine whether a member will benefit from accepting any offer; and no pressure should be placed on members to decide to accept any offer.
This guidance is also intended to have wider application. The Regulator’s view is that it should also apply to other situations where members are asked to make a choice – e.g. where they are invited to agree to scheme modifications or benefit forfeitures – but it is not intended to apply to proposals for closure to future accrual.