More flexibility on the way for member option exercises
November 24, 2015
Over recent years many trustees and scheme sponsors have considered member options as a way of managing the risk in their pension scheme and making a full range of choices available to their scheme members. A Code of Good Practice (the ‘Code’) for such exercises was launched in the summer of 2012, which gave both trustees and companies the comfort to implement exercises, as they were able to work through a clear set of principles to ensure they were applying best practice.
This Code is currently under review to ensure it remains effective three years on, and to consider whether any changes are required as a result of the new pension freedoms. Based on initial consultation with the industry the expectation is that any revisions to the Code will be positive.
A proportionality test is likely to be included, meaning employers and trustees can offer members with benefits valued at £10,000 or less, the option to take all of their benefits as a cash lump sum without the employer having to pay for advice from an independent financial advisor (IFA). Similarly members with a pension of less than £500 a year can be given the option to exchange some of the future increases on their pension for a higher pension now without the employer needing to fund advice costs.
For members under the proportionality test, the employer is no longer obliged to pay for the member to receive a recommendation from an IFA. A helpline will have to be made available to address any questions the member has, but they can choose whether or not they need this assistance. Recognition that for some members this decision truly is trivial, but that other members will need some help and guidance seems a sensible approach, which will ultimately reduce implementation costs. These costs were a potential blocker for trivial commutation exercises, which can help employers and trustees manage their risk and reduce high administration costs being paid in relation to small pensions.
The Code currently doesn't apply if you are making members aware of the options that become available to them when they reach age 55 - and this will continue to be the case. Early indications are that it will also be possible to conduct a "wash-up" exercise by communicating the option to all members who are already over age 55, without falling under the Code.
But, even in situations which fall outside the Code, in practice I think that many companies and trustees will want to apply its principles anyway.
Both trustees and companies will be keen to operate in line with best practice and avoid any reputational risk. Whilst not having to comply with the Code means the employer is not obliged to pay for financial advice, in practice this may be money well spent to make it as easy as possible for members to consider which option is going to be most appropriate for them.
Final decisions on the Code will be made in the coming months, and the Pensions Minister's commendation will be sought, before the Code is re-released in late 2015. The proposed revisions to the Code are positive and reflect the fact that member options have a key role in helping a member make the right decision about their benefits and in helping both companies and trustees manage pension scheme risk.
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