Pensions Bill implications for incentive exercises

While changes to state pensions may have stolen the headlines recently, the draft Pensions Bill published on 18 January also introduces the power to ban member incentive exercises that use non-pension inducements to encourage members to transfer out of defined benefit (DB) pension schemes.  The power is time limited and will fall away if the Government does not use it within seven years.

If exercised, this power could affect enhanced transfer value (ETV) and total pension increase exchange exercises if there is a non-pension inducement for a member to transfer.  (The Government lists examples of non-pension inducements as cash payments, cars, holidays, shopping vouchers, additional annual leave).  The proposals do not appear to affect pension enhancement inducements such as increasing a member's transfer value.

This move does not come as a surprise.  The Pensions Minster has been vocal in his opposition to non-pension inducements and such activities are now prohibited under the voluntary industry Code of Good Practice for Pension Incentive Exercises (The Code) published in June 2012.  The Pensions Bill gives the Government the power to legislate against the use of non-pension inducements if the Code does not put a stop to these, as even if the Government decides to use this power, there appears to be nothing here that goes beyond requirements of the Code.

The Code has provided more certainty on best practice for running incentive exercises.  Incentives exercises that are run in accordance with the Code continue to make a valuable contribution to reducing financial risk in DB pension schemes as well as providing increased flexibility and choice for members as to how they access their retirement savings.  After an initial period of bedding in following the publication of the Code, we are starting to see a significant increase in companies exploring the use of these exercises.

As part of the industry working group responsible for drafting the Code, PwC are well placed to discuss our insight of the Code and what this means for running successful incentive exercises.

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