The Pensions Regulator (TPR) has published a principles-based statement on incentive exercises following a publication in June of an industry code on this area.

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

TPR has abbreviated its previous guidance to avoid any confusion, which focus on the overarching principles published in its December 2010 guidance.

The five principles outlined in the statement are:

  • An offer should be made in a clear, fair and not misleading way, to enable members to understand the implications and make decisions that are right for them.
  • The offer should be open and transparent, so that all parties involved in the process are made aware of the reasons for the exercise and the interests of the other parties.
  • Conflicts of interest should be identified and appropriately managed in a transparent manner and, where necessary, removed.
  • Trustees should be consulted and engaged from the start of the process, with any concerns arising through the exercise alleviated before progressing.
  • Fully independent and impartial financial advice should be made accessible to all members and promoted in the strongest possible terms. In almost all circumstances, the structure of the offer should require that members take financial advice.

The regulator first issued detailed guidance on incentive exercises in January 2007. This was most recently updated in December 2010.

Bill Galvin, chief executive at TPR, said: “We welcome the industry’s bid to drive up standards. This is important because any transfer out of a defined benefit pension scheme poses a significant risk to members, who may not be equipped to make an informed decision, and such offers won’t be in most members’ best interests.

“For those employers that decide to undertake such an exercise, the industry code sets out the good practice principles that should be applied.

“If conflicts are appropriately managed, trustees are engaged throughout the exercises, and the principles in the industry code are followed, then exercises should fulfil and be consistent with our principles.”

Read the TPR’s statement on incentive exercises

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