Consultation on Transfer Incentives: Sackers’ Response

Background

TPR published draft guidance on transfer incentives for consultation on 13 July 2010. We use the term “transfer incentives” in line with the way it is used in the draft guidance. That is, as a broad term for the practice of employers seeking to manage their pension scheme’s liabilities by offering members a choice to transfer out of the scheme, or modify their benefits under the scheme. Currently the practice is commonly implemented by offering members enhanced transfer values (ETVs), or the opportunity to exchange non-statutory pension increases for an initially higher fixed rate pension.

Scope of the guidance

The draft guidance anticipates that trustees will effectively regulate transfer incentive exercises, standing between the employer and the member, and starting from the position that the exercise is unlikely to be in the interests of members.

We are concerned that:

this is not an appropriate role for trustees to play, in what is in fact an offer made by the employer;
trustees will often not have any legal powers, or resources, to carry out this role;
trustees will not be in a position to know whether transfer incentive exercises are, or are not, in the interests of individual members, and could be exposed to liability if they are seen to be making choices for members in these circumstances.

We agree it is very important that members receive full and clear information about the offer being made so that they can make their own individual choices. We believe it is useful to cover the types of information that should be included in guidance to employers.

However, if in reality the regulatory view is that these types of exercises should be treated like financial promotions regulated by the FSA, then in our view it would be sensible for this to be made clear in legislation, rather than requiring trustees to try and achieve a similar result.

Guidance for employers?

As indicated above, given that transfer incentive exercises are driven by employers, and trustees’ involvement in such an exercise may be limited, we believe the focus of the draft guidance could usefully be changed, for example, to have separate guidance for employers who are contemplating transfer incentive exercises (or at least a greater focus on the employer, rather than on trustees’ responsibilities).

Modifications to scheme rules

Section 1 suggests that the guidance “can equally be applied to scheme modifications […] where members are being asked to make a choice”. Given that section 67 of the Pensions Act 1995 provides extensive statutory protections for members in relation to the modification of subsisting rights, we do not think it is helpful for the guidance on transfer incentives to suggest there may be additional requirements, via the guidance, to those which are set out under section 67.

Closed schemes

It is helpful to have TPR’s confirmation that the guidance does not apply to proposals for schemes being closed to future accrual.
Application to DC Schemes

While transfer incentive exercises are likely to be more common in relation to DB schemes, the same issues could also apply for employers who change their DC pension provision from a trust-based arrangement to one that is contract-based. It would be helpful if this were noted in the guidance.

Trustees’ involvement

Trustees’ Legal Position

We believe the guidance places the trustees in a difficult (and potentially legally impossible) position.

When an incentive exercise is carried out, the offer is something which is driven by the sponsoring employer. While trustees clearly have a duty to ensure that their scheme is administered in accordance with the scheme rules, as well as legislative and regulatory requirements, they are not in control of the offer being made.

In the case of ETVs in particular, the employer will often be able to make the offer without the assistance of the trustees. Members will exercise their statutory right to a CETV and either:

the employer offers a cash sum, or a direct top-up to the member’s new pension arrangement; or
the employer may have sole power to augment members’ benefits under the scheme in order to increase the CETV payment.

Trustees’ powers

Trustees’ powers will in practice often be limited to:

asking the employer to clarify certain points in its communication materials (although employers are not obliged to take this into account);
making an announcement to members to cover any information they believe is missing from communications issued by the employer (although trustees have limited resources to do this without support from the employer);
in extreme circumstances, refusing to implement the employer’s proposals if they would contravene the scheme’s equality rule (or if they are inconsistent with other scheme rules);
restricting the employer’s access to information for data protection purposes (although in practice most employers have authority to deal directly with the scheme’s administrators, and also trustees cannot assume the offer will be against the interests of all members, so will usually need to co-operate in the provision if information); and
reporting to TPR in connection with any concerns they may have about a transfer incentive exercise.

It would therefore be helpful if TPR outlined its expectations of trustees in these circumstances.

Consultation (Principle 4)

We fully support the principle that trustees should be consulted when an employer is contemplating a transfer incentive exercise. In particular, it is important that trustees recognise “the need to manage the scheme’s investment funding and cash flow through any cycle of membership or benefit change”.

However, we do not think it is appropriate for trustees to become involved in shaping transfer incentive exercises, as this could lead to the perception that the incentive offer is being made from the scheme, rather than the employer. This runs the risk of exposing trustees to liability in connection with an offer over which they ultimately have no control.

Independent Financial Advice

Trustee Role

The draft guidance (for example, the third bullet point on page 16) suggests that trustees need to take an active role in reviewing the employer’s choice of independent financial adviser (IFA). We do not think this is appropriate in practice, given the advice will be in the context of the employer’s (and not the trustees’) offer.

We do however support the use of IFAs in transfer incentive exercises where they are able to add value. We understand IFAs are generally able to advise on ETV exercises, but may not be in the same position for other incentive exercises. It is important that the guidance does not suggest a transfer incentive exercise will be proceeding on an improper basis where no access is given to an IFA, if this is in an area where IFA advice is not realistically available (for example, pension increase exchange exercises).

Fees

The draft guidance suggests (in the last paragraph of the first column on page 13) that an employer should:

make available an IFA to all members to whom the transfer incentive is offered; and
offer the alternative of reimbursing any members who seek their own financial advice.

Clearly members should be encouraged to take financial advice, and it is good practice for their employer to make available and pay for an IFA to counsel members who are offered a transfer incentive. However, it may not be realistic to expect employers to meet the costs associated with members seeking their own advice. Indeed, it is entirely conceivable that members will receive more focused (and cost effective) advice if they use the services of an IFA who has been made available by their employer. The employer will be in a position to brief the IFA fully about the offer in a way which would not be possible where members seek advice from alternative IFAs. The employer will also be in a position to satisfy itself that the IFA it engages is of a sufficiently high standard and has sufficient knowledge of such exercises.

Cash offers

The draft guidance states (in the third bullet point on page 15) that “Cash incentives distort the members’ decision making process in respect of their retirement provisions”.

In our view, however, the appropriateness of cash for the individual is a matter for the advice given by the IFA. By way of analogy with cash commutation at retirement, the majority of members choose this option and have good reasons for doing so (and IFA advice is not required). The same reasons may be relevant for members who choose to take advantage of a cash incentive payment.

Making an offer

The Appendix is described as an “illustrative list” of information necessary to include in an incentive offer, “which should not be used as a checklist to guarantee the offer complies with the principles of this guidance”.

While we understand that the list is not intended to be exhaustive, and that the information provided to members will need to be tailored to the circumstances of each individual scheme and the offer being made, it would be extremely useful for employers to have a checklist of key information to include in their communications. It would therefore, in our view, be helpful to describe the list in that way.

While it is important to ensure that members receive sufficient information to enable them to make an informed decision about an employer’s incentive offer, at the same time, the employer needs to ensure that its communications are clear and accessible. Provision of too much information can have a detrimental effect on engagement with members.

Sanctions

It is unclear what powers TPR could use in connection with a transfer incentive exercise and it would be helpful if the guidance clarified what the sanctions it refers to would be.

In particular, we note that the draft guidance (at the second bullet point on page 15) refers to scenarios which prefer one group of members over another, and states that “Any attempt to exploit the protection of the PPF is likely to attract sanction from the regulator”.

We also believe it is worth making a distinction here between situations which could potentially lead to exploitation of PPF protection, and others which would have no bearing on PPF compensation.

Additional Points

We also wish to raise the following additional points:

Best interests of beneficiaries: The draft guidance uses the phrase “best interests of beneficiaries”. As we have noted in previous responses to TPR consultations (for example in our response to TPR consultation on conflicts of interest (submitted on 29 May 2008) and on internal controls (submitted on 1 March 2010), this is an over simplification of the legal requirement. In our view, it would be more appropriate to state that the trustees have a duty to “safeguard the interests of the beneficiaries”.
Accounts: The draft guidance suggests (in the seventh bullet point in the second column on page 19) that “It would be helpful if the impact that acceptance would have on the employer’s accounts could be quantified in relation to the particular member concerned”. Given that this type of information is not static, it will be virtually impossible to present this information in a meaningful way.