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Adviser  >  Technical Central  >  OPS Matters  >  Guidance on transfer inducements published

Guidance on transfer inducements published

On January 24th, Her Majesty’s Revenue and Customs and The Pensions Regulator both published information on how transfer inducements are to be treated. This has some major implications for trustees and employers seeking to reduce their ongoing scheme liabilities via the inducement (or ‘sweetener’) route. Here’s a summary of what it all means:

HMRC – The tax/NI position

HMRC have admitted that their interpretation of how the legislation treats inducements where they’re paid in the form of a cash sum from an employer to a member was wrong. Transfer inducements are still allowed but any that take the form of a direct cash sum will now be treated as earned income and will also be subject to NI contributions. Where an offer has been made before the announcement on 24 January 2007, HMRC may not apply tax/NI provided certain conditions are met. These conditions are basically that either HMRC previously confirmed the payments would not be subject to tax/NI or that the employer has proof that they were relying on the previous position.

TPR – Impact on trustees, employers and employees

The TPR guidance gives an indication of how any inducement arrangements or offers should be handled. The Regulator also mentions that the guidance will be of use to Independent Financial Advisers who advise on transfers out of or into defined benefit pension schemes.

It’s worth noting that this guidance applies to inducements in general – not just the cash payments that are now caught by the HMRC’s change in position.

What should employers do?

The key is communication. The guidance recommends that the members should be fully informed of what the inducement means, how it will affect their benefits and the risks involved. For example, any communication should include:

• details of why the offer is being made,
• exactly how much benefit is being given up in the DB scheme,
• how much the inducement is,
• how long the offer of the inducement will be on the table, and 
• a recommendation that the member seeks independent financial advice before making any transfer out of the scheme.

The list given in the guidance is longer but it’s along the same lines. The overall aim is to make sure that members are fully informed of the benefits/risks of accepting an offer.

What should Trustees do?

The Regulator wants trustees to get involved in any discussions about inducements early on to ensure that the scheme members are fully informed about what the inducement is and what it will mean for their benefits. And at all times during these discussions, to bear in mind their duty to act in the best interests of the scheme members.

The guidance recommends that trustees:

• check the employer communications to make sure that all the points covered in the guidance are included,
• scrutinise carefully any inducement plan to make sure it’s appropriate. As an example, can the money that will be used to provide the inducements simply be used to shore up the scheme deficit instead?
• So in line with other recent TPR publications, the onus is very much on the trustees to get involved.

Anything else?

Three words - advice, advice, advice. Throughout the recommended action found in the guidance, this word comes up again and again when members are mentioned. In fact the guidance recommends that members themselves make sure that any communication they receive stresses the importance of seeking independent financial advice. And they should ask questions to make sure that the trustees are aware of the offer and have thoroughly checked it out.

Does the guidance have to be followed?

It’s the same old story – whilst the guidance isn’t in itself enforceable and transfer inducements aren’t illegal, the Regulator will look carefully at any inducement arrangement where their guidance hasn’t been followed and see if the employer or trustees have done anything to jeopardise member’s benefits, the employer covenant, and if anything they’ve done increases the risk of schemes falling into the PPF. And if they do find things aren’t quite right, it’s then that they can use their statutory (and quite considerable) powers.

In other words, it’s best to follow the guidance now rather than get caught out later.