UK: A Trivial Consideration?

Last Updated: 18 February 2015
Article by Katie Turney

In December 2014, the Incentive Exercise Monitoring Board (the "IEMB") confirmed in a new Q&A document that the Code of Good Practice for Incentive Exercises (the "Code") applies to small and trivial commutation exercises if they are "one-off" rather than "business as usual" exercises. This clarification is timely given the new pensions flexibilities which from 6 April 2015 will, amongst other things, enable individuals to commute their trivial pension pots or take small lump sum payments in wider circumstances than previously.

The Code of Good Practice

The Code was prepared by a pensions industry working group and issued in June 2012 in response to concerns that members' interests were not being adequately protected as increasing numbers of employers sought to minimise their liabilities under defined benefit pension schemes through incentive exercises. Compliance with the Code is voluntary, although the Pensions Ombudsman and the Financial Ombudsman Service will take adherence to the Code into account when deciding cases of alleged misconduct by scheme trustees and/or employers. The Pensions Regulator also supports the Code and revised its own guidance on incentive exercises to reflect the 'principles-based' approach favoured by the Code.

What does the Code say about small and trivial pension commutation exercises?

As originally issued the Code does not specifically refer to small or trivial commutation exercises, so the starting point is to consider whether the offer to commute trivial pensions is a "transfer exercise" or a "modification exercise" for the purposes of the Code. The distinction is important as it determines whether the trustees and scheme administrators running the incentive exercise need to offer "advice" or less formal "guidance".

The IEMB in its December 2014 Q&A takes the view that a one-off trivial commutation exercise would constitute a "modification exercise" under the Code. The consequences of this are that (so long as the deal is a "100% balanced deal") trustees and scheme administrators must simply offer "guidance", and whilst they must comply with the Code's requirements on "vulnerable clients" there is no requirement for the trustees to put a vulnerable client policy in place.


Guidance is defined as "every aspect of a process by which a member is assisted by a member adviser in making a decision" as to whether to accept the offer of trivial commutation. The Code provides that:

  • Guidance should be given by a "member adviser" who is independent from the employer
  • That adviser must be suitably qualified and experienced
  • Guidance should be paid for by the party initiating the offer
  • Guidance should be complete and relevant as possible but is not a written fact-find
  • There is no requirement for a recommendation to be given after the consultation but the conversation should be adequately recorded

A 100% balanced deal

Ascertaining the "balanced deal percentage" requires the trustees or scheme administrators to undertake a "balanced deal calculation". This involves working out the value of the members' benefits before and after the modification using the framework of section 67 of the Pensions Act 1995 to compare the two figures. The calculation will result in a single "balanced deal percentage" figure for all members and must be 100% or more to satisfy the "value requirement". If this requirement is not met the Code envisages that more formal "advice" needs to be provided to members which involves a more detailed assessment of the member's circumstances and the provision of written recommendations.

Vulnerable clients

The Code uses the term "vulnerable clients" to refer to those clients who might be particularly vulnerable by virtue of age, health, or capacity and who may therefore require special attention. This includes only offering incentive exercises to members who are over the age of 80 on an "opt-in" basis.

When is a trivial commutation exercise "one-off" rather than "business as usual"?

An invitation or inducement that is not ordinarily available to members of the pension scheme, for example a bulk trivial commutation exercise, would in our opinion constitute a "one-off" exercise and the Code would therefore apply. If, however, trivial commutation is to be offered to all members as part of their usual retirement options on approaching their Normal Retirement Date or NRD, this is likely to fall within the remit of "business as usual" activity. Although the Code would not then apply in these circumstances (meaning that neither "guidance" nor "advice" need be provided), the IEMB takes the view that the seven key principles of the Code should still be considered in order to ensure good practice.

Wedlake Bell comment

As trustees, scheme administrators and employers attempt to get to grips with the rapidly changing pensions landscape, the recommendations of the Code may seem an onerous and unnecessary administrative burden. There are two points to note here.

  • First, with increased flexibility has come increased paternalism from a government keen to avoid another mis-selling scandal in the wake of their ambitious reforms, so increased focus on good practice and protecting members' interests is inevitable.
  • And secondly, because the Code applies only to one-off exercises the burden will not be an ongoing one. Trustees and administrators who put in place arrangements to offer these new flexibilities to members as a matter of course as they approach NRD will be outside the scope of the Code.

It is also worth noting that the IEMB are planning "a major review of the Code" later in 2015 "once government policy, legislation and market developments have become clearer". Watch this space.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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