Code of Practice on incentive exercises updated

In 2012 an industry working group published a voluntary Code of Good Practice on Incentive Exercises (the Code). This was designed to provide voluntary regulation of exercises such as offers to members of enhanced transfer values, or pension increase exchanges (PIEs). These exercises had become an increasingly common way for defined benefit (DB) scheme employers to reduce liabilities within the scheme, but there was concern that members did not always fully understand the offers made, and that they may be making poor decisions, particularly when offered cash incentives.

A Monitoring Board was set up to monitor how the Code worked in practice, and it published a revised version of the Code in February 2016 (click here to access a marked-up version showing the changes). The original Code was largely well received, and the revisions that have been made are incremental. The seven core principles that formed the basis of the original Code remain. 

Alongside the revised Code a set of ‘Boundary Examples’ has been published, which give useful guidance on tricky situations and whether the Code will or will not apply in those situations. The practitioner’s notes which were published with the 2012 version of the Code are no longer being updated, and are largely superseded although the Code states they may continue to helpful in some cases. 

The most significant changes introduced are as follows:

• Proportionality Threshold: this new concept applies to transfers where the member is being offered a transfer value of £10,000 or less, commutation of DB benefits where the cash commutation payment is £10,000 or less, and to a PIE where the pension that can be modified under the offer is of £500 per annum or less. The limits should be applied cumulatively.

  Where the Proportionality Threshold applies, the Code is modified so that there is no requirement to provide or pay for advice for affected members before they accept an offer, although guidance should be made available and readily accessible to members who wish to have it.

• Trivial commutation: there had been uncertainty as to the extent to which the Code applied to trivial commutation payments. The Monitoring Board announced that the Code does apply to these types of payment in January 2015. The revised Code confirms that it applies to ‘full commutation exercises’, which are defined as offers made as part of an exercise where members are offered a cash lump sum in full replacement for a pension. The Boundary Examples include two useful illustrations of trivial commutation exercises, one of which would be covered by the Code, and one which would not, and thereby giving useful guidance on the factors to take into account when determining whether the Code applies.
• Advice: the revised Code recommends that when giving advice, the adviser should consider the implications of the offer on other parties, such as the spouse and other beneficiaries of the member, and advise the member (and as appropriate the other parties) on those implications. 

Winding-up lump sums (WULS) are not covered by the Code, but the Monitoring Board notes that it foresees the growth of them being used as incentive exercises, and that it therefore plans to consult with the industry during 2016 on whether or not certain types of WULS should fall within the Code. The revised Code notes that in relation to WULS all parties should be mindful of the principles of the Code. 

The revised Code applies where an offer is made available to members after 1 February 2016.