TPR issues draft guidance on transfer incentives

Introduction

Concerned by their increase in popularity, TPR has issued for consultation draft
guidance on transfer incentives.1 It builds on the 2007 guidance on Inducement
Offers2 and aims to strengthen TPR’s position.

An inducement or transfer incentive3 is where a sponsoring or associated
employer of a DB scheme seeks to remove some or all of the scheme’s
liabilities by persuading members to transfer or modify benefits, usually by
offering a financial incentive in return.

But TPR makes it clear that the draft guidance is not intended to apply to
proposals for schemes to be closed to future accrual.

In this Alert:

• Key points
• Guiding Principles
• Trustee involvement
• The end for incentives?

Key points

• TPR has issued draft guidance on transfer incentives for consultation.
• TPR wants trustees to become actively involved in any incentive exercise,
  starting “from the presumption that such exercises are not in members’
  interests”.
• Employers should ensure that any offers they make comply with the
  principles outlined in the guidance, but should beware that TPR may still
  take action if members are coerced or put under pressure to accept an
  incentive offer.

Guiding Principles

TPR’s draft guidance says that an incentive offer from an employer to scheme
members should adhere to 5 guiding principles:

• Principle 1: Clear, fair and not misleading – members should be able to understand the implications of the offer and make the right decision for them;
• Principle 2: Open and transparent – everyone involved should be made
  aware of the reasons for the exercise and the interests of the other parties;
• Principle 3: Manage conflicts of interest – conflicts should be identified,
  managed and, where necessary, removed;
• Principle 4: Trustee consultation – the trustees should be consulted and
  engaged from the start and their concerns (if any) alleviated;
• Principle 5: Independent financial advice – fully independent and impartial advice should be available to all members and promoted in the strongest possible terms. Most offers should be structured to require members to take financial advice. If an employer has concerns about members’ ability to understand the offer and its implications, then it should pay for the advice and require members to receive it before making a decision.

The draft guidance sets out examples of information to be included in the offer.
Where a transfer out of a DB scheme is involved, the employer should explain
that the scheme accepting the transfer value may not provide the same level of
benefits.

Trustee involvement

The draft guidance suggests trustees should:

• approach any exercise “cautiously and actively”;
• ensure that members’ interests are properly protected; and
• ensure members make an informed decision.

This may involve requesting that the employer pay for independent and
impartial financial advice and reviewing and commenting on the employer’s
communications.

The end for incentives?

TPR has firmly nailed its colours to the mast. David Norgrove made it clear in a
speech4 to the NAPF in December 2009 that “it is unlikely to be in members’
interests to transfer out of a DB scheme”.

The draft guidance suggests the costs may outweigh the perceived benefit of
any such exercise. The final nail in the coffin?

1 http://www.thepensionsregulator.gov.uk/docs/transfer-incentives-consultation-document-july-2010.pdf 
2 http://www.thepensionsregulator.gov.uk/guidance/guidance-inducement-offers.aspx
3 Inducements are renamed transfer incentives to avoid confusion with the Pensions Act 2008 duty not to “induce” a worker to opt out or leave active service in relation to auto-enrolment
4 http://www.thepensionsregulator.gov.uk/doc-library/the-role-of-trustees-in-our-protection-framework.aspx