Is reducing scheme liabilities too onerous?

Laura Cumming

or Subscribe to Feed

I recently had a need to review the Regulator’s Guidance on Incentive Exercises which was updated in December 2010. While on the face of it the principles are not too different to the original guidance I thought it worth re-iterating a few of the main points.

An Incentive Exercise (formerly known as an Inducement Exercise) is where an offer is made by an employer to a Defined Benefit scheme’s members to transfer out or amend benefits, usually in return for some form of financial incentive, with the intention of reducing liabilities or risk in the scheme.

These exercises remain a viable starting point for any company tackling the funding levels of a Defined Benefit (DB) scheme and, as long as they are dealt with in accordance with the Regulators guidance and with the input of the Scheme’s Trustees, offer an attractive alternative to many members if pitched at the right level.

The Pensions Regulator tells Trustees they should start from the assumption that such an exercise is unlikely to be in the best interests of the members. However, would it not be the case that this will depend on each members personal circumstances and the benefits which they are ‘giving up’, hence the reason for independent and impartial financial advice, preferably organised and paid for by the Employer (although if the advice is not in relation to a regulated product, an IFA may not be appropriate).

It is vital that the Trustees are engaged at the earliest possible opportunity as they are responsible for ensuring that the members are properly communicated with and that any communications, while including all of the relevant information, are jargon free, easy to understand and not in any way misleading or threatening. Members must be made aware of the reason for the employer carrying out such an exercise, the benefits they may be giving up and the possible risks they will be taking on. Members are however responsible for their own decisions and cannot ask either the Trustee or the Employer to advise them.

Conflicts of interest must be identified and dealt with at the outset of such an exercise, whether in relation to Trustees who are also scheme members, company representatives, or financial advisers who are remunerated in accordance with the success of an exercise. Any exercise of this nature must be carried out in accordance with the scheme’s trust deed and rules and any relevant legislation, and must be implemented in an open and honest manner.

Historically, incentive exercises have received bad press – and perhaps not without reason. However, all in all, I am of the view that the regulations are fair and not too onerous and should not deter employers as long as they recognise that this is not an inexpensive option, that any offer needs to represent value, there is a need to provide staff with clear communication and independent financial advice and that they are prepared to fully engage with the Trustees from the earliest possible opportunity.

Comments