The Code of Practice for Incentive Exercises was released on Friday. One of its key recommendations was that any “modification” offer made to scheme members should be accompanied by an indication of whether the offer represents fair value for the average member.
John Broome Saunders, Actuarial Director at BROADSTONE, said “Focussing on fair value is likely to have implications for other pension scheme member options – such as exchanging some pension for a cash lump sum on retirement – that fall outside the scope of the Code of Practice. The pension reduction that schemes make when members opt for a cash lump is, in many cases, considerably more than the sort of fair value reduction anticipated by the Code of Practice. In some cases, the reduction applied is as much as a swingeing £1pa pension for every £10 of cash taken. A more reasonable reduction could be half this amount. Therefore scheme trustees are now likely to find themselves under pressure to provide more generous conversion terms. Unfortunately for employers, any improvement to these terms will increase pension liabilities – perhaps by as much as 5% of non-pensioner liabilities.”
John Broome Saunders