The Code of Good Practice on Incentivised Transfer Exercises aims to improve standards and stamp out industry bad practice in this area. It has been developed by the Institute and Faculty of Actuaries alongside groups including the Association of British Insurers, Department for Work and Pensions and National Association of Pension Funds.
It sets out seven principles for running incentive exercises which are intended to ensure they are carried out fairly and transparently and communicated to scheme members in a balanced and understandable way.
In particular, sponsors are told they should not offer cash incentives that are dependent on a member accepting an offer made under a transfer exercise. Any incentive exercises should also be made available with appropriate regulated and qualified independent financial advice, paid for by the employer involved, and aim to achieve high levels of member engagement.
Scheme sponsors should also provide members with regulated access to the independent complaints and compensation process.
Pensions minister Steve Webb said the code was particularly aimed at addressing concerns over cash incentives being offered to scheme members to give up salary-related pension rights.
‘I therefore very much welcome the work that has been done to come up with an industry code to stamp out bad practice. This new code of practice must be adopted as the standard for all transfer exercises in the future, without exception,’ he said.
Joanne Segars, chief executive of the National Association of Pension Funds, added: ‘This is a code of practice, not a detailed and prescriptive handbook. It is crucial that everyone complies with the spirit of the code, not just with its specific recommendations.
‘The industry must also realise that if the code doesn’t work then regulation is likely to be the next step – and that is something it should try to avoid.’
Alan Howard, who sat on steering committee responsible for developing the code on behalf of the Actuarial Profession, highlighted the role it would play in policing the use of enhanced transfer values. ETVs are an increasingly popular way for employers to reduce their liabilities and risk exposure by incentivising members to leave their defined benefit scheme. Members are offered a payment greater than that they would otherwise be offered if they wanted to transfer into another pension arrangement.
‘ETVs are a relatively new phenomenon and therefore regulations and complete guidance have until now been lacking and this concerned our members,’ Mr Howard said.
‘The Institute and Faculty of Actuaries shared these concerns and participated from the outset with the DWP to help shape a practical code of good practice for those involved in incentive exercises, including ETVs and we are commending the code to our members because it sets out an agreed best practice for the first time.’
He added: ‘Widespread adoption of the code, together with the recent changes in Pension Transfer Analysis Assumptions from the Financial Services Authority which regulates the advice given to individuals offered ETVs and other incentives, will lead to better outcomes for individuals who are offered transfers from final salary schemes.
‘Providing people with the right information in a language that they understand and with the support that they need to make an informed decision is vital. Adoption of the code will mean that individuals will have this and should be able to make a decision that is right for their particular circumstances.’