Responding to concerns that as a result of poor communication, lack of understanding or inappropriate persuasion, thousands of pension plan members may have made poor decisions on their pension savings, the Department of Work and Pensions set up a working party in November 2011 to establish an industry wide code of good practice on member incentive exercises. These exercises include offers to members to transfer their benefits out of defined benefit pension schemes (known as enhanced transfer values) and offers to pensioners to give up inflation linked pension increases in return for alternative benefits.
Chris Massey, human resources partner at PwC and one of the industry experts on the working party, believes the new code announced today (9 June) will provide greater clarity for employers and improve protection for pension scheme members.
“The new code of practice recognises that member incentive exercises can both help employers manage their legacy pension liabilities and provide valuable options for members. It is in the interests of all concerned that members are able to understand whether an incentive exercise is in their best interests. The code of practice gives employers clear guidance on how they can continue to use these exercises to manage their pension liabilities while providing appropriate protection for the interests of members.
“The introduction of stricter governance, making the process more explicit and transparent will give employers and pension funds renewed confidence to continue using member incentive exercises.
"The code of practice bans the use of cash payments to pension scheme members who agree to transfer their defined benefit pension scheme benefits. This is a tough measure, but the risk that members could make poor long-term decisions significantly increases when cash incentives are included. Enhanced transfer offers can be in the interests of both employers and members. However, the removal of cash incentives will almost certainly change the way in which they are designed and communicated to members.
"Many employers have been waiting for clearer guidance on how they should design member incentive exercises and provide advice to members. It will take some time to digest and adapt to the new code, but I think this is the guidance that many have been waiting for.
“With protective measures now in place to reduce the risk of poor decision making and clear guidance on effective communication with scheme members, we will hopefully see an improvement in member incentive exercises from the member’s perspective while at the same time increasing the likelihood of the exercise achieving the employer’s objectives for running the exercise in the first place.”
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