Benefit consultants have reported that as many as three-quarters of their defined benefit scheme clients are considering incentive exercises to reduce their risks following the introduction of the Budget freedoms.
Incentive exercises allowing members to transfer out of their DB pension scheme or sacrifice future increases in exchange for a higher initial pension may now prove more popular among members, who have more options to convert their pension pot since March tax changes.
Alan Collins, director at consultancy Spence & Partners, said 75-80 per cent of DB clients were looking at carrying out incentive exercises, compared with 50 per cent or less prior to the budget announcement. Such exercises can release a chunk of schemes' liabilities.
“For incentive exercises, we would expect firms who have looked at them before to revisit and those with legacy DB issues to look at them for the first time in 2015,” said Collins.
He attributed the rise to the increase in freedom, but added the rising awareness of pensions may have had a peripheral effect. “You could argue pensions have been put on the agenda with auto-enrolment, but it’s difficult to say it’s had much of an effect,” he said.
For incentive exercises, we would expect firms who have looked at them before to revisit and those with legacy DB issues to look at them for the first time in 2015
Alan Collins, Spence & Partners
Calum Cooper, partner at consultancy Hymans Robertson, said: “It’s something a lot of corporates will be looking into because of the relative attractiveness of taking money into the new DC environment.”
While many more schemes are looking at incentive exercises, Cooper said, very few have come to actually carry them out.
“The reason a lot of people will be looking at rather than implementing is because trustees will want to know about the [guidance guarantee]," he said. "It’s something we’ve seen a lot of clients looking at; I haven’t seen anyone carry one out yet."
Cooper said schemes may decide to introduce incentive options for members when they retire, allowing them to opt for a pension increase exchange or similar options.
However, he said enhanced transfer values would be most likely to appeal to older scheme members, as it was better to keep a pension pot "in the safer DB environment" until retirement approaches.
Rosalind Connor, partner at law firm Taylor Wessing, said the production of a code of good practice for incentive exercises raised their appeal. “Since we got a code of good practice… it made people think about it a lot more,” she said.
The government consultation on the pension freedoms includes a provision stating schemes must pay for independent advice for members being offered an incentive exercise, which may lead to low take-up.
Connor said: “It’s very hard for the adviser to say you should move out of a DB pension scheme.” The provision is a departure from the earlier suggestion members should be banned from transferring from their DB scheme to DC.
“The consultation and its responses should be heading in [the direction of] giving more freedom to DB members,” said Collins.
