What incentives may be offered to transfer?

What incentives may be offered to transfer?

Due to the high costs of funding defined benefit schemes, employers are looking at ways to reduce risks or costs associated with their schemes by offering the option to transfer benefits where the transfer value amount is more than the statutory minimum.

The Pensions Regulator has a statutory duty to protect members and they have taken a keen interest in employer incentive exercises as members may be disadvantaged if they don’t make properly informed choices.

Code of Practice

The Government policy is to promote saving for retirement so, inducing people to transfer benefits which may mean that they are giving up some rights, goes against the government’s aim.

A voluntary code of practice was produced in June 2012 and the details can be found on the Pensions Regulator's website.  

Compliance is voluntary but it will be used by the Pensions Ombudsman and the Financial Ombudsman Service when dealing with complaints.

Incentive exercises to transfer benefits

Introduction

Incentive exercises can be costly for employers but what about the members?

What do members need to be aware of when they are offered an incentive to transfer their benefits?

Let’s look at some key questions a member may ask.

What are the risks?

With a transfer incentive exercise there is a greater risk that a member may suffer a loss of benefits in the long term. This loss could be due to:

• life expectancy
• investment choices
• economic and market environment in the future.

Offers are often set below "cost-neutral” terms in order to reduce the employer’s pension liabilities, this means there is a greater risk that the member will be worse off. 

When designing incentive exercises, trustees are often advised to start with the presumption that they are not in the best interest for most members.

What information should I receive?

The offer should be clear, fair and not misleading in any way so that the member understands the implications and can make decisions that are right for them.

The information should:

• be honest and contain no inaccuracies, ambiguity or exaggeration, it should not omit or hide anything;
• not cause fear or distress to the member without good reason; and
• be open and transparent – in other words the member should be made aware of the reason the offer is being made.

All communications should be unbiased and information from the employer should simply inform the member of the offer and the process. It should not attempt to influence the member’s decision in any way other than to encourage them to engage with the adviser process.

The initial employer communication should include:

• a clear statement that the member does not need to accept the offer and the default position if the member takes no action;
• a description of the offer – what is being given up, what is being offered, the risks and benefits of all alternatives;
• the reason the employer is giving the offer;
• warnings of potential risks of accepting the offer;
• contact details that are easy to find including those for TPAS and the Pensions Ombudsman;
• an explanation of the roles of the PPF, FCA and TPR;
• prominent statements that the Code is being followed and that any other areas of compliance have been met; and
• charts, tables and/or figures that illustrate risks and benefits in a fair and balanced way. For example, illustrations of risk should include a suitably wide range of possible future inflation, investment returns and annuity price outcomes.

After receiving regulated financial advice, the member should get a written, tailored recommendation that is in their best interests and that explains the reason for the recommendation.

Should I take independent financial advice?

Yes!The employer should make fully independent and impartial advice accessible to the member and it should be promoted in the strongest possible terms. The offer should require that members take advice from an authorised financial adviser. As the employer has initiated the exercise, it should pay for the advice and any associated services such as help-lines and the Transfer Analysis Report.

The contract between the member and the regulated adviser should make it clear that the member has legal recourse to the adviser if necessary in the future and clearly state the complaints process, limitations in liability and refer to any Professional Indemnity Insurance.

The regulated advice should include at least one face to face or telephone meeting with the member and advice must be tailored to the individual and their circumstances as a whole.

It is a legal requirement for members to take appropriate independent advice from a regulated financial adviser if they are considering transferring DB benefits to a DC arrangement where the transfer value is over £30,000.

How long do I have to make a decision?

Members must be given sufficient time to make up their mind with no undue pressure applied. Suggested timescales for the member are listed below:

1. At least three months to make the decision from the date the member received the information and offer.
2. Once the member has received the final piece of regulated advice they should be given two weeks to make a decision.
3. Once the member has returned the option form there should be a two week cooling off period.

I have been offered some extra money, can I accept it?

A member should not receive any cash incentive that is only available if the offer is accepted.

Cash payments that are designed to encourage the member to engage with advisers before making a decision are allowed but should be of small material value such as a £50 retail voucher. 

However, it must be made clear that accepting this payment will not put the member under any pressure to accept the transfer offer.