FRC to Consult on Actuarial Standards for Pension Incentive Exercises

Jack Humphrey, Regulatory journalist
February 21, 2012 /

The FRC’s Board for Actuarial Standards (BAS) has announced that the FRC will consult on bringing actuarial work on pension incentive exercises into the scope of its technical actuarial standards (TASs).

The consultation will also consider whether the TASs should include specific principles to be followed when providing actuarial advice on incentive exercises.

An incentive exercise is where a sponsoring or associated employer of a defined benefit pension scheme seeks to remove some or all of its liabilities by offering scheme members some sort of incentive to transfer or modify their benefits.

The most common form of incentive is an enhancement to the calculated transfer value of the member’s benefits in the scheme, a cash payment in addition to the transfer value, or a mixture of the two, on the condition that those benefits are transferred out to another form of pension provision which is invariably a defined contribution scheme. These are known as enhanced transfer value exercises (ETVs).

Another form of incentive exercise is a pension increase exercise (PIE) where the member is asked to give up non-statutory post-retirement pension increases (usually in respect of benefits accrued from employment before 1997) in return for a higher flat rate pension within the scheme.

The Pensions Regulator (tPR) has published guidance on incentive exercises which is primarily aimed at two distinct groups who need to understand and consider the issues involved in any incentive exercise. These groups are: sponsoring and associated employers considering offering an incentive exercise; and trustees to the pension scheme where an exercise is being considered or carried out.

The FRC’s move is one of several initiatives being undertaken by regulators and industry groups in order to address concerns expressed by the Pensions Minister, Steve Webb, that members of defined benefit schemes may be overly influenced by financial incentives being offered, without appreciating the value of the benefits they are giving up.

Commenting on the announcement, Jim Sutcliffe, Chairman of the BAS, said: “Actuaries may not advise scheme members directly but they frequently advise the other parties involved, who need to be aware of the risks and uncertainties to future pension benefits of any proposals that are put to members.

“The TASs already provide a good framework which might be used for such advice. Our consultation will explore whether, in conjunction with proposals by other parties, further measures should be taken to support the provision of better information, safeguards and outcomes for scheme members.”


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