Nadine Wojakovski questions how much of an impact the code of good practice on incentive exercises will have on the industry and whether it will have its intended effect on enhanced transfer values

Last month a code of good practice on incentive exercises for pensions was published by the industry working group in order to protect members’ long-term interests. Chair of the group Margaret Snowdon said the code’s principles would ensure that good practice became the norm rather than the exception and would help “restore confidence” in incentive exercises.

Exercises started around the early 2000s and soon after there was a perception that some of them were being carried out on a sharp basis. Overall there was a fear that many members were not provided with independent financial advice and in extreme cases there was concern that members were being bribed to give up their DB pension.

As a result the publication of the code has been widely welcomed. It is largely viewed as a strong framework where greater emphasis is given to advice and increased member protection. LEBC Group chief executive Jack McVitie welcomes the code, in particular the fact that detailed advice or guidance should be given in all instances. He argues that members should understand the true value of any changes to their income in real terms, particularly with pensioner inflation at a very high level. Prior to the code there were many instances of an offer being made without advice and therefore out of the scope of the FSA. This meant there was no recourse which led to bad decisions and choices being made.

McVitie believes that having the choice to structure DB benefits in a similar way to that of DC members is a step in the right direction and the code sets out the parameters for how to do this effectively. Unfortunately, the bad press about cases where bad advice was given has made some people dubious about there being any advantage to a member taking early benefit. He argues that this is wrong as there are scenarios where it can be beneficial. For example, pension increase exchange exercises’ whether one-off or as part of a rolling offer to retiring members, offers more flexibility and real value to particular people, such as those with health problems. Also, where there is a spouse pension attached, in many cases it makes sense for a single person to take a transfer value and buy an annuity instead.

McVitie says the industry has now been given a chance to act in a responsible manner. “A carefully constructed offer, which is communicated in a balanced way and in terms that members can understand, can have benefits for schemes and members alike,” he offers. “As long as people respect the code and more importantly respect the member of the scheme and offer them advice that is backed up by the formal complaints procedure of the FSA then there is a very strong framework in place.”

In a similar vein Buck Consultants senior corporate actuary Colin Richardson says the code is a “substantial move forward” for the industry and should go a very long way to eradicating poor practice. Examples of bad practice would be unbalanced or misleading communication to members and/or employing an IFA firm that is willing to recommend transfers against the FSA guidelines.

Compliance
However, so far most of the reaction to the code has come from the advisory space rather than from employers so the industry will need to wait and see what employers and indeed trustees will do with the code, offers Stephenson Harwood pensions partner Fraser Sparks. First and foremost he questions whether employers will even follow the code or will they say ‘there’s been too much bad press about these exercises so let’s try something else?’

If they do follow it then he says it is “a useful starting point” for employers but argues that in certain circumstances they may wish to move away from the code if there is a good reason for doing so. “In some instances employers may not wish to give the full period of time [to consider an offer] and instead give a shorter time. Some exercises are tied to de-risking, where there’s corporate restructuring which means that the incentive exercise may need to happen quicker,” he explains.

There has also been a clear conclusion by the working party that cash incentives should now be opposed and many in the industry support this as cash incentives can distort members’ decisions. Pensions Minister Steve Webb was very particular about this matter and welcomed the industry code “to stamp out bad practice”. He says this new code of practice “must be adopted as the standard for all transfer exercises in the future, without exception”.

But, in spite of this pressure to conform, Sparks believes some situations are justified in being handled differently. He explains: “Personally, I am ‘pro-choice’. As long as these exercises are communicated properly why shouldn’t an offer including a cash incentive be put to the member so that they can assess their own situation and work out for themselves whether this is a good idea?

“The government is obviously hoping employers will comply with the code in full but ultimately by not complying this does not mean that employers will have breached a legal obligation.” If employers have a good reason for moving away from the code then they are entitled to consider another option, he says. “As long as these reasons are documented and there is an audit trail and the communication to members is transparent, then, as things currently stand, I think that is okay.”

The most important objective of the code was to provide increased member protection and Richardson says he thinks it will be “largely successful” in that objective. He is upbeat about the code saying it’s very good and nearly all advisory firms will have a policy of fully supporting it. To that end legislation appears very unlikely. Indeed, he says there’s a lot of pressure on all advisers to only be involved in exercises that comply with the code and anyone who opts to continue offering others runs the risk of members coming back to complain about pension transfer mis-selling many years later. Furthermore, he believes most insurance companies will have a blanket policy on not accepting such transfers.

And even if the code is not well adhered to legislating in this area is very difficult and therefore not at all inevitable, argues McVitie. For example a blanket ban of say, transfers could be very controversial if members lose out. The recent case of British Midland going into the Pension Protection Fund is a case in point. Now the deferred members’ benefits have been reduced and in fact, he notes, a pension transfer would have been a better choice for them.

The pressure to comply with the code is quite intense on all parties. The ABI says it “expects all its pension providers to comply with all principles within the code that are relevant to their business, and only transact transfer business undertaken in compliance with the code of good practice”. The NAPF says it “strongly supports” the code and will help to monitor compliance. Moreover, says its chief executive Joanne Segars: “It is crucial that everyone complies with the spirit of the code, not just with its specific recommendations.”

DLA Piper pensions lawyer Tamara Calvert says she does not think further legislation is “inevitable”, or indeed likely, but it can’t be ruled out. The industry working group is made up of representatives from a broad cross-section of the industry including the DWP. “With such wide support and expertise behind it, one has to hope that the code will be enough to ensure good practice through voluntary compliance,” she observes. Whilst it doesn’t have the force of law she says it is hard to see how trustees in particular could fail to comply with the code if faced with an incentive exercise.

Richardson also believes compliance is more or less inevitable. “The government has engineered the situation where we would expect almost universal compliance. Therefore it’s not likely that the government would need to legislate.”

Written by Nadine Wojakovski, a freelance journalist

Share Story: