Transfer incentive exercises

July/August 2010

We first raised our increased concerns about transfer incentives in December 2009 when we suggested that trustees should begin from the presumption that such exercises are not in members’ best interest. While we do recognise that every decision will be specific to the individual in question, our stance has not changed.

In light of this we have recently published updated trustee guidance which highlights the risks and considerations needed when undertaking such an exercise. This was published for consultation in June and we are currently seeking feedback from the industry. The consultation will close in early October.

Our concerns

Our major concern is that members will be encouraged to take up the offer of a transfer without being fully aware of the consequences of their actions.

Transfer incentive exercises are complicated and as the FSA say in their guidance on DB transfers: “it is very difficult to make a direct offer financial promotion for a DB pension transfer that is fair, clear and not misleading… and meets the FSA’s other rules.

“Such a decision is likely to be too complex for a consumer without specialist knowledge to make and it will be very difficult for a financial promotion to fully explain the risks.

“…in reviewing such financial promotions, the FSA will start from the presumption that such transfers are not suitable.”

Our stance echoes this sentiment.

We have already seen some very worrying behaviour in this market. Situations where for example:

• advice is paid for by the employer – on the condition that members take that advice
• excessive pressure is placed on the member to make a decision
• inaccurate or incomplete information is provided to members, often including the misleading suggestion that the future of the scheme is uncertain and that it is in the interest of the member to transfer out
• excessive time pressure is placed on members to make a decision – with suggestions made that there isn’t enough money to go around and so members must move quickly to take advantage of the offer.

We take a very dim view of such behaviours, which all put members at significant risk.

The role of the trustee

Whilst we recognise that transfer exercises are a transaction between employer and member trustees can play an important role in ensuring that members’ interests are represented and protected.

Trustees have a duty to act in a way that protects members’ benefits and as such we expect all trustees to engage actively and to apply a high level of scrutiny to any transfer exercise.

In term of ensuring that members receive appropriate advice and support trustees should also be comfortable that the advice offered is both impartial and independent.Trustees should also check that there are no potential conflicts of interest. If conflicts do exist then trustees should raise this with the employer and encourage them to appoint a different adviser for the purpose of the transfer exercise.

To view the full inducements guidance and to submit a consultation response, visit our website www.thepensionsregulator.gov.uk/strength.aspx.

Carl Davey is defined benefit policy manager at the Pensions Regulator