With the ongoing unstable economic climate and the growing volatility of defined benefit pension liabilities, many sponsoring employers are looking at ways to manage and reduce their pension scheme liabilities through 'de-risking'.
Two concepts which are coming to the fore are enhanced transfer value exercises (ETVs) and pension increase exchange exercises (PIEs).
Both are classed as incentive exercises. While many may have heard of, and subsequently undertaken, an ETV in relation to their pension scheme, a PIE exercise may not have been considered yet by the sponsor as a mechanism to look to reduce the pension scheme liability.
With ETV exercises, the organisation effectively encourages their deferred members to transfer benefits to another pension arrangement, by offering a higher than normal transfer value. In doing so the employer crystallises its liability albeit for an immediate cash injection.
PIE exercises are generally targeted at pensioner members or active members at the point of retirement. The member is given the choice of giving up, usually non-statutory, pension increases, in exchange for a higher initial pension. Take-up is influenced by the member's views on their own life expectancy, lifestyle and future inflation rates, as well as whether they have income from other sources.
The aim in both exercises is to produce a winning position for the employer, trustee and member, while the other defining feature is that it always remains the member's decision as to whether they accept the incentive being offered.
After a period of stagnation, incentive exercises and advice surrounding such projects have developed significantly over the last few years.
The critical stance taken by the Pensions Regulator within its previous guidance on the area of 'de-risking' had led to employers being reluctant to press ahead with ETVs or PIEs. This had arisen as a result of poor practice on these exercises in the past which had discredited these projects.
However, the Pensions Regulator's acceptance that incentive exercises are here to stay has led it to issue a statement supporting the Code of Good Practice for Incentive Exercises, removing any doubt about its position.
Together the Code and the statement provide a firm framework for employers to manage defined benefit pension liabilities in a fair and transparent way that trustees can be comfortable with. Employers can now press ahead with implementing incentive exercises, provided they follow the Code of Good Practice.
At Smith & Williamson we have experience of advising individual members during the ETV exercise with the support of the sponsoring employer. We have also advised and assisted both the sponsor and trustees on all incentive exercises, implemented project management plans and worked with leading pensions lawyers to deliver the project in line with the Code. Please feel free to contact us if you wish to discuss implementing incentive exercises as a de-risking strategy.
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.