The Incentive Exercises Monitoring Board (IEMB) first published its voluntary code on pension incentive exercises in June 2012. Version 2 of the code has now been issued, with some additional content including helpful boundary guidance.

The principles behind the code remain the same but it has been updated to reflect changes in practice. The new code applies in any case where an offer is made to a member after the date of publication – so any proposed exercises where offers have yet to be made should be reviewed in line with the new code.

Although the code is not legally binding, it is supported by the Pensions Regulator and could be taken into account by the Regulator, the Pensions Ombudsman and the FCA when exercising their functions.

The code sets out industry good practice and is relevant in situations where there is an invitation or inducement (usually initiated by the employer) to a member to change the form of their accrued DB pension rights where:

  • one objective is to reduce cost or risk to the scheme; and
  • the offer is not ordinarily available to members of the scheme (i.e. not business as usual (BAU)).

The code splits incentive exercises into two broad categories:

  1. Transfer Exercises (where one of the requirements is for financial advice to be provided and paid for).
  2. Modification Exercises (where financial advice must be provided unless certain value criteria are met, in which case guidance may be offered instead).

Transfer Exercises include enhanced transfer value exercises, total pension increases exchanges and (new for version 2) the conversion of DB benefits into DC. Modification Exercises include full commutation exercises and partial pension increase exchanges.

A few points on the key features of the revised code:

  • the party initiating the offer is responsible for following the code;
  • the key objective is to enable members to make informed decisions and better choices;
  • key principles include that there should be no cash incentive and communications with members should be fair, clear, unbiased and straightforward; and
  • there is a new proportionality threshold which removes the requirement to provide advice (although guidance should still be made available). This applies to transfers or commutations of £10,000 or less or modification of a pension of £500 per annum or less.

The new boundary guidance is likely to be very useful. It looks in some detail at the BAU threshold in various circumstances. This will determine whether the code applies at all. For an exercise to fall outside the scope of the code on the basis it was BAU, the following features would be expected to be present:

  • not time limited;
  • the same options, on consistent terms, being offered as is usual for the scheme;
  • the same access to, and level of payment for financial advice, being offered as is usual for the scheme;
  • consistent communications in style, content, balance etc. to those usually published; and
  • communications coming from the same party (or parties) as would be usual for the scheme.

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.