TPR statement on incentive exercises

Introduction

Following the publication of an industry “code of good practice” on incentive exercises (the “Code”)1 TPR has reviewed and replaced its incentives guidance with a short principles-based statement.

In this Alert:

• Key points
• What is an IE?
• The story so far…
• Principles
• Trustees’ role
• TPR’s role
• What next?

Key points

• TPR’s statement addresses the role of trustees (which is not covered in detail in the Code).
• It remains TPR’s view that trustees should approach incentive exercises (“IEs”) with caution, and start from the presumption that they will not be in most members’ interests.

What is an IE?

An IE is where an employer connected to a DB scheme seeks to reduce risk or cost associated with the scheme by offering members the option to transfer out of the scheme or to modify their benefits.

The story so far…

TPR has “long taken an interest in IEs”. In its opinion, IEs may disadvantage scheme members, particularly if they are not conducted in a manner which ensures that members will make properly informed choices. In January 20072and December 20103 respectively, TPR issued and revised detailed guidance on IEs.

In November 2011, Steve Webb, the Pensions Minister, confirmed his intention to “crack down” on bad practice in relation to IEs. To achieve this, he tasked an industry working group with improving the standard of such exercises, “while preserving [them] as a legitimate tool for sponsors to help manage the liabilities in their [DB] pension schemes”. The result was the publication of the Code on 8 June 2012.
TPR supports the Code and considers it to be well aligned with its previous guidance. As such, it has concluded that its December 2010 guidance can be significantly cut back.

Principles

TPR’s latest guidance on incentive exercises sets out five principles for conducting an IE exercise. Although similar in some respects to the seven principles set out in the Code, it is clear that TPR also expects its five principles to form a minimum standard for such exercises.
In brief, TPR’s principles are as follows:

• Principle 1 – that any offer should be made in a clear, fair and not misleading way;
• Principle 2 – the offer should be open and transparent;
• Principle 3 – conflicts of interest should be identified and appropriately managed;
• Principle 4 – trustees should be consulted and engaged right from the start; and
• Principle 5 – fully independent and impartial financial advice should be made accessible to all members and promoted in the strongest possible terms.

Trustees’ role

TPR advises trustees to make sure they understand the extent of and act in accordance with their legal obligations. To achieve this, among other things, TPR suggests that trustees should:

• take advice;
• fully understand the IE, its structure and how it achieves the level of good practice recommended in the Code;
• address the requirement to act fairly in relation to the scheme members, including between those transferring out and those remaining in the scheme;
• be aware of and meet their data protection duties; and
• consider the impact on scheme funding – the employer’s covenant may be affected where its capital is used for an IE.

If trustees are unable to resolve concerns with the employer in relation to an IE, TPR suggests they refer the issue to TPR or the Pensions Ombudsman.

TPR’s role

TPR will investigate reports of cases where certain behaviour give it cause for concern. Such behaviour will include:

• selective offers to certain scheme members which are seeking to advantage one section of the scheme membership over another;
• any attempt to exploit the protection of the PPF; and
• coercing or placing undue pressure on members to transfer or give up their benefits.

Any review of an IE by TPR will take into account the trustees’ involvement in the exercise. If TPR has concerns as to trustees’ ability to understand and discharge their duties, it may undertake a wider review of the general administration and governance of the scheme and/or use its powers to intervene (for example, by appointing an independent trustee).

What next?

Although the Code’s monitoring body has yet to be established, TPR intends to monitor the information it produces with a view to keeping its own position under review.

1Please see our Alert: “New Code of Practice on Incentive Exercises” dated 11 June 2012
2Please see our Alert: ““Inducements – TPR Guidance published” dated 25 January 2007
3Please see our Alert: “Guidance on incentive exercises / annuities legislation – the pre-Christmas flurry” dated 13 December 2010