The Pensions Regulator

Regulation roundup: InducementsArticles

Regulation roundup: Inducements

The Pensions Regulator has recently issued guidance on the subject of inducements. These are incentives, usually financial, that some employers offer their occupational DB scheme members to persuade them to transfer out of the scheme or to accept a reduction in benefits.

This is an area of concern to the regulator, which has a statutory objective of protecting members' benefits.

The regulator believes that it is essential that employers, trustees and members fully understand the implications of such offers. In particular, members need to consider the value of the inducement offer carefully, and to be aware of the financial risks involved. Trustees should apply a high level of scrutiny to inducement offers, and must ensure that members are given all the information they might reasonably need in order to make an informed choice. IFAs who offer advice in this area should also be aware of the guidance.

The regulator recognises that employers may have commercial reasons for encouraging members to transfer out of DB schemes, or to consent to rule changes that reduce benefits. However, the risks to members cannot be ignored. As the regulator's chief executive Tony Hobman said: “While we recognise that employers may not break any laws when they offer an inducement, whether it is cash payments or an increased transfer value, we are concerned that some transfers are being proposed to avoid an employer's full pension liability.” Where a proposed transaction has the aim of reducing a scheme's buy-out debt it may be advisable, regardless of whether an inducement offer is made, to seek a clearance statement from the regulator, or to discuss the matter with the regulator's corporate risk management team.

Trustees should look carefully at the scheme rules when an inducement offer is made, and must ensure that the legislation is complied with if any modification is proposed – the regulator's codes of practice, Modification of subsisting rights, provides additional help in this area. Trustees must establish whether an inducement offer represents good value, and may need to take financial and legal advice before making this decision.

If an offer goes ahead, as the guidance emphasises, trustees should ensure that the need for members to take independent financial advice comes out strongly in the employer's offer. As Tony Hobman said, "Trustees, in particular, have a duty to scheme members to take whatever steps they can to help ensure that members recognise the full impact of what is being asked of them. This should include encouraging members to take independent financial advice and to consider carefully the current and prospective funding position of the scheme."

Published: Pensions World, March 2007