The practical guidance in the industry code as to how plan sponsors should properly conduct incentive exercises, if they choose to do so, is well aligned with the regulator's principles.
Therefore the regulator has abbreviated its guidance to avoid any confusion arising from two standards - focusing on the overarching principles published in its December 2010 guidance.
The regulator’s guidance also c the role covers of trustees, which is not covered in detail in the industry code. The regulator says it remains its view that trustees should approach such exercises with caution and presume that they will not be in most members’ interests. This will involve taking advice, where necessary, and acting in accordance with their legal obligations to scheme members.
Regulator chief executive Bill Galvin said: "The regulator welcomes the industry’s bid to drive up standards. This is important because any transfer out of a defined benefit scheme poses a significant risk to members who may not be equipped to make an informed decision, and such offers won't be in most members’ best interests.
"For those employers that decide to undertake such an exercise, the industry code sets out the good practice principles that should be applied. If conflicts are appropriately managed, trustees are engaged throughout the exercises, and the principles in the industry code are followed, then exercises should fulfil and be consistent with our principles.”
National Association of Pension Funds (NAPF) Policy Director, Darren Philp adds: “This guidance sits alongside the new industry Code of Practice on incentivised pension exercises, which the NAPF helped to develop.
“We would have preferred to see the Code as the only source of reference to help keep things simple. However, we are pleased that this guidance is a streamlined version of the previous edition and that it points the reader towards the Code.
“We need to ensure that people make the right decisions for their retirement, so it is essential that employers comply with the new Code of Practice. The NAPF will play its role in helping to monitor compliance over the next year.”
Nick Griggs, partner at Barnett Waddingham, said: “This statement replaces TPR’s December 2010 statement on incentive exercises and has been streamlined thanks to the close alignment of the Industry Working Party code of practice with TPR’s principles.
“Although the statement is addressed to employers, trustees, and advisers, it is very much focussed on trustee responsibilities."
“Despite anticipating that employers will follow the Industry Working Party code of good practice, TPR still warns trustees that they should start from the assumption that incentive exercises are not in most members’ best interests. We think this is now an unnecessarily strong stance, which could cause trustees to be obstructive, rather than actively engaged. Employers will need to present a good case for the exercise to overcome trustee suspicions."
“TPR notes that incentive exercises can be expensive and there is a risk that the gain to the employer will not outweigh the costs. This is a sound reminder of the importance of a diligent feasibility study and a realistic expectation of take-up rates. The employer can then make an informed decision on whether to proceed."
“TPR also recognises substantial cash injections from the employer to finance an exercise can weaken its covenant. Whilst this could be true of enhanced transfer exercises, a pension increase exchange would not normally require additional financing.”