Increased clarity about what represents good practice and how that will apply in future could bring more ‘freedom and choice’ to members of defined benefit (DB) pension schemes, Willis Towers Watson says.
A new version of the Code of Good Practice on Incentive Exercises for Pensions was today published by the Incentive Exercises Monitoring Board (IEMB). The Code was originally launched in 2012. This followed concerns that members may make poor decisions if offered a cash incentive to transfer out of a DB scheme before retirement, or if they gave up future pension increases without understanding their value. The Code applies to options not ordinarily available to members, but the IEMB encourages trustees and employers to consider its relevance where options are made available as a matter of course. Stewart Patterson, senior consultant at Willis Towers Watson, said: “A well-run member option exercise can be a win/win/win scenario. The members have more choices, the sponsor can reduce their pension risk and the trustees increase the scheme’s security while responding to members’ desire for flexibility.”
“Following the Code has become the starting point for trustees and employers who want to make these offers in the right way, recognising that this will be one of the biggest financial decisions that some members ever make. The Government has said that its ‘freedom and choice’ agenda may be extended to give DB members new ways to swap pension for cash without having to transfer out of the scheme. While trustees wait to see if and when that will happen, they have been thinking about what choices they can offer members now. The clarity that a refreshed Code provides is likely to encourage more sponsors and trustees to embrace such exercises.”
Most of the changes that have been made to the Code are quite minor – for example, the new version reduces the advice requirements for employers in relation to small pensions and has been reworded to reflect the fact that offers are often instigated by trustees. Stewart Patterson said: “Since the ‘freedom and choice’ changes for defined contribution pensions were unveiled in Budget 2014, members of DB schemes, together with sponsors and trustees alike have been considering how they can access this flexibility. The publication of the new version of the Code removes elements of uncertainty around how certain options might be undertaken. In particular, there had been differences of opinion about when options allowing members to exchange small incomes for a one-off lump sum are in scope of the Code, and new material published by the IEMB helps to clarify when the Code applies to these exercises.”
The Code is voluntary, but the Pensions Ombudsman takes account of whether it has been followed when reviewing complaints. Trustees and employers may take further reassurance from the endorsements offered by the Pensions Minister and the Chair of the IEMB. In her foreword, Baroness Altmann says she is pleased that the “good standards set out [in the Code] have been embraced by advisers and employers alike…The Code set challenging standards that have contributed hugely to improving Incentive Exercises.” Reviewing how the Code has worked to date, IEMB Chair Margaret Snowdon concludes that it has led to “less risk of members being disadvantaged”.
