Cash incentives for DB transfers forbidden by code
Voluntary code calls for increased transparency, more readily available advice to members and no more cash incentives for leaving DB pensions.
Cash incentives to encourage employees to transfer out of their defined-benefit scheme should not be offered under any circumstances, an industry working group has argued in a newly-published code of good practice.
Under the voluntary code, cash incentives must not be offered to employees in exchange for transferring their pensions out of defined benefit schemes.
A cash incentive includes “anything which has a value to the member that is not a pension benefit arising from a UK registered pension scheme”, including payments in cash, goods and services.
Incentive exercises should only be offered to members older than 80 on an opt-in basis.
Also, advice must be provided to the member in advance of transfer exercises and communications with members should be fair, clear, unbiased and straightforward.
The code was co-authored by an industry working group of 29 professionals including chair Margaret Snowdon of the Pensions Administration Standards Association, a steering group of 17 including former AIFA head Stephen Gay, and three other contributors.
It received support from 12 industry bodies including the Pensions Regulator and the Association of British Insurers.
Speaking out in support of the code, Steve Webb, pensions minister, said: “For some time I have been concerned about incentive exercises that involve bad practices. I have seen many examples of exercises that left me in no doubt action was needed. I was not prepared to stand by and allow this to continue - the risks were simply too great.”
Commenting specifically on the practice of offering cash incentives, Mr Webb said: “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.
“The practice of offering cash incentives for people to give up valuable salary-related pension rights was a source of particular concern.”
Although the code is entirely voluntary, the authors hope all future incentive exercises will “follow the spirit and principles of the code” and urge employers, trustees and their advisers not to “look for creative ways to work around the code2.
Steve Gay, director of life, savings and protection at the ABI, said: “We must protect people from making pensions choices contrary to their long term interests. Where employees are offered to transfer out of their defined benefit scheme, the offer must be transparent without cash incentives likely to distort people’s choices.”