Cash transfer incentives to be banned as part of new pension scheme voluntary code of practice

The Code of Good Practice on Incentive Exercises (32-page / 604KB PDF), which was developed by the industry in response to a call from pensions minister Steve Webb, states that cash incentives cannot be "contingent on the member's decision" to accept an incentivised exercise such as an increase in the transfer value of the scheme member's benefits.

Cash payments of "relatively small material value", designed solely to "encourage members to engage with the process", will be permitted. The code also requires employers to fund independent, impartial advice from qualified financial advisers before an incentivised exercise takes place.

Although the Code is voluntary, industry representatives said that it would improve both the standard of incentivised exercises and protections for pension scheme members taking part in them. The Code has also been endorsed by the Pensions Regulator and the Financial Ombudsman Service (FOS).

Pensions law expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, was part of the wider industry forum which commented on the report. She said that there would likely be a difference of opinion within the industry about whether cash incentives should be banned in all cases. Scheme members would have been able to benefit in some cases, she said, providing that the incentive exercise was well run and scheme members had access to independent financial advice.

"By coming out against the use of cash offers as part of an incentive exercise, the hope is that the Code will prevent the need for legislation in this area," she said. "At a time when many defined benefit schemes are underfunded and funding levels are volatile, it is important that employers are able to manage their scheme liabilities. Incentive exercises are a valid way of doing this, although they have been discredited by some bad practice."

Last year, Steve Webb told pension industry executives that he would "not stand by" while companies "bribed" their employees to transfer their pension funds out of costly employer-funded defined benefit schemes. He said that he "welcomed" the work that had gone into the code, which he hoped would "stamp out bad practice".

"Whilst it is understandable that firms need to manage their pension liabilities this must be done in a way that enables scheme members to make informed choices about their pensions," Webb said. "The practice of offering cash incentives for people to give up valuable salary-related pension rights was a source of particular concern. This new Code of Practice must be adopted as the standard for all transfer exercises in the future, without exception."

The code applies where incentives are offered to pension scheme members who transfer their pension entitlement out of a defined benefit scheme and also where defined benefit entitlements are modified. Where modifications are made, the employer will not have to fund financial advice if it provides guidance to scheme members alongside a "value requirement" setting out the difference in value of pensions before and after the exercise takes place.

Employers must also ensure that any communication with scheme members is "fair, clear, unbiased and straightforward", and that they are given "sufficient" time to make up their minds with "no undue pressure". The code also contains additional protections for "vulnerable" members, including those over the age of 80.

Joanne Segars, chief executive of industry body the National Association of Pension Funds (NAPF) said that in order for the code to be effective, employers would have to comply with "the spirit of the code, not just with its specific recommendations".

"The industry has worked together to take this action and we think it will help protect savers and pensioners," she said. "The industry must also realise that if the code doesn't work then regulation is likely to be the next step - and that is something it should try to avoid."