TPR Guidance on Transfer Incentives

Introduction

Over the last few years, some employers who sponsor closed defined benefit schemes have sought to reduce their scheme liabilities by offering members an incentive to transfer their benefit entitlement out of the scheme.  The incentive may be either a cash sum or an enhancement to the transfer value offered.  The member loses his defined benefit guarantee but may gain more flexibility in how he takes his retirement benefits eventually.

The Pensions Regulator is concerned at some of the practices that have been followed in such exercises: hence the revision of the previous guidance.  The new guidance applies equally to other benefit conversion exercises, such as those where pension increases are converted to additional level pension.  The main focus is that incentive exercises should be undertaken with the utmost regard to members’ interests.

The Regulator states that success will be judged with regard to member outcomes.  Since the majority of members involved in transfer incentive exercises will be many years from retirement, one wonders how such outcomes will be judged!

Key Points

The key points that the Regulator wishes to communicate are:

• his concern that pension scheme members may be disadvantaged by incentive exercises,
• that members should have access to fully-independent financial advice,
• that employers should ensure that offers are consistent with the principles set out in the guidance,
• that trustees should scrutinise any offers to ensure that members’ interests are protected and
• that no pressure should be placed on members to accept the offer.

More controversially the Regulator suggests that trustees should start from the presumption that incentive exercises are not in members’ interests.  In itself this appears to be an extreme viewpoint that is not necessarily justified.  However, the more reasonable stance that follows is that the trustees should consider the position of all members – those who transfer and those who remain in the scheme – and ensure that the transfer of risk between the two groups is achieved fairly.

The 5 key principles employers should follow

1. An offer should be made in a way that is clear, fair and not misleading, to enable members to make an informed and appropriate decision.
2. The offer should be open and transparent, so that all parties are made aware of the reasons for the exercise and the interests of the other parties.
3. Conflicts of interest should be identified and managed appropriately in a transparent manner and, where necessary, removed.
4. Trustees should be consulted and engaged from the start of the process and any concerns alleviated before progressing further.
5. Fully independent and impartial financial advice should be made available to all members, paid for by the employer and promoted strongly; in most cases the structure of the offer should require that members take financial advice.

The Regulator warns that it will identify and react to reports of cases where the principles have not been observed.  Where necessary it will enforce the protection of members’ benefits through the use of contribution notices and/or financial support directions.

Further considerations for employers:

• legal and reputational risk: members may bring claims against the employer many years after the exercise;
• selective offers to certain members carry a greater risk of some members being treated less favourably than others;
• the Regulator is likely to intervene if there is any attempt to exploit the Pension Protection Fund or if there is an adverse effect on the employer’s ability to fund the scheme;
• evidence suggests that a cash incentive may distract members from logical decision-making;
• members may complain to the Pensions Ombudsman: his directions are enforceable in the same way as court judgments;
• employers have a duty of care when providing information or advice to scheme members;
• the cost of undertaking an incentive exercise may be higher than the potential benefit to be realised.

Further considerations for trustees:

• trustees should be mindful of their obligation to act in the best interests of the members at all times;
• they should ensure that they understand the structure of the offer sufficiently to enable them to safeguard members’ interests;
• they should request that the employer pay for independent and impartial financial advice to members;
• they should consider their legal position with regard to any decisions they are required to make;
• data protection legislation;
• how the funding of the incentive exercise will affect the employer’s covenant and the scheme’s current funding;
• trustees should scrutinise the employer’s communications to members, ensuring that they are accurate and complete;
• trustees should consider notifying the Regulator of any unreconciled concerns;
• members may bring claims against a trustee for losses arising as a result of the trustee’s breach of duty.