Employers will be banned from offering cash incentives to members of company pension schemes in return for giving up valuable benefits, under a new code of practice launched today.
The voluntary code, published by the Industry Working Group on Incentive Exercises for Pensions, says no cash incentives should be offered that are connected to a member’s decision to transfer their pension. It also requires employers to provide and fund advice by qualified and experienced advisers for transfers provide guidance when schemes are modified.
Association of British Insurers director of savings life and protection Steven Gay says: “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.”
The working group is supported by the ABI, the National Association of Pension Funds and the Confederation of British Industry. It was set up after pensions minister Steve Webb raised concerns last year about the growing number of people with company pensions who had been offered such arrangements.
Estimates provided by KPMG to Department for Work and Pensions last year suggest 80 per cent of transfers involve a cash incentive. The department says these cash incentives “significantly increase” the number of people switching pensions even when they have been advised it is against their best interest.
Webb says: “”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. This new code must be adopted as the standard for all transfer exercises in the future, without exception.”
Under the code, employers will have to provide and fund advice by qualified and experienced advisers for all transfer exercises. When schemes are modified firms must either provide advice or use approved methods to set out the difference in value of pensions before and after the changes and provide “guidance”.
Other measures in the code include:
- No backdating of Pension Increase Exchanges with the objective of creating an additional cash incentive to accept an offer;
- Guidelines on valuing PIEs to show how the offer compares to the value of the existing pension arrangements;
- Fair, clear and unbiased communication of offers to members;
- Sufficient time and no undue pressure on members to accept an offer;
- Greater protection for vulnerable members.