The first Code of Good Practice on pension incentive exercises was introduced in June 2012 to address concerns about poor practices being adopted in pension incentive exercises. Further information on the 2012 Code can be accessed here.
The Code was well-received in the main by the pensions industry and, though voluntary, has been widely complied with by both trustees and employers in our experience. In December 2014 the Incentive Exercises Monitoring Board issued guidance confirming that the Code applied to one-off trivial and small pension commutation exercises which were not ‘business as usual’.
The second, revised Code will apply to all in-scope member offers made from 1 February 2016. The key points to note from the revised Code are as follows:
- Seven principles remain: the seven principles – no cash incentives, independent advice, communications, record-keeping, no undue pressure, vulnerable members and good faith - remain unchanged but the body of the Code has been updated to reflect the changing environment.
- Practitioner notes: The practitioner notes accompanying the first Code have not been reviewed as part of the process of preparing the revised Code and will not be maintained in the future. The original notes will remain available for reference.
- Boundary and other examples: the Board has published a separate document to illustrate the scope of the Code, i.e. when it does and does not apply. The examples do not form part of the Code and may be reviewed, removed or supplemented from time to time. The Board counsels against ‘cherry-picking’ facts to fit a particular example and conclude that an exercise is not within the scope of the Code. The boundary examples provide some helpful guidance on the distinction between business as usual (BAU) exercises (which will be outside of the scope of the Code) and incentive exercises. Indications of BAU activity include the absence of time limits, equivalent terms, options and access as offered in a BAU context and consistent communications in terms of style, content, balance and also source (i.e. the party offering the option) to in an BAU context.
- Winding-up lump sums (WULS): the Board confirms that the Code is not intended to apply generally in relation to exercises associated with winding-up and that in many cases WULS are expected to fall outside of the scope of the Code. However, it foresees the growth of WULS being used as incentive exercises and there will be a consultation during 2016 on whether or not the Code should be specific about which types of WULS should fall within the Code and include some additional boundary examples to support this.
- Commutation exercises: the revised Code confirms that ‘full commutation’ exercises are modification exercises for the purposes of the Code. Full commutation is defined as ‘an offer made as part of an exercise where a member or members of a UK registered defined benefit pension scheme are offered a cash lump sum in full replacement for a pension that would otherwise have been available to them’. Any offer of cash that first involves conversion to DC benefits should be treated as a transfer exercise. Application of the code will depend on the circumstances of each exercise and the BAU points will be relevant as above.
- New proportionality threshold: for principle 2 (advice or value requirement), a new proportionality test will apply. In relevant circumstances, the Code’s requirements in relation to the requirement to provide advice or guidance have been considerably softened, though a requirement to make guidance available and readily accessible is retained. The ‘softening’ applies where a member is being offered a transfer value or cash commutation payment of £10,000 or less and where, for pension increase exchange offers and similar, the pension that can be modified under the offer for a particular member is £500 or less.
We expect that the revised Code will be welcomed by the industry and particularly the clarification provided around full commutation exercises. The boundary examples provide some helpful guidance on the scope of the Code given this, in our experience, has been the greatest area of difficulty in application for both trustees and employers.
To discuss the impact of the revised Code on any ongoing or proposed member pension exercises, please contact a member of the S+W Pensions team.