Abolition of short service refunds
The Pensions Act 2014 introduced new requirements for members who leave an occupational (i.e. trust-based) Defined Contribution (DC) scheme with between 30 days and 2 years qualifying service. Under the new provisions, trustees will no longer be able to pay short service refunds to leavers with 30 or more days pensionable service. The change will take effect for members joining DC occupational pension schemes on or after 1 October 2015.
Members joining a DC scheme on or after 1 October 2015 will only be entitled to a refund of contributions if they:
- opt out within the 30 day opt-out period after being automatically enrolled; or
- leave the scheme with less than 30 days qualifying service.
The second situation will be relatively rare and can only impact members who are contractually enrolled or who are not eligible for automatic enrolment but join the scheme voluntarily.
Members who joined before 1 October 2015 will retain the right to a short service refund if they leave the scheme and have qualifying service of less than 2 years (subject to provisions in the scheme rules).
The change will only apply to trust-based DC schemes. Defined benefit occupational scheme will still be able to make short service refunds. Personal pension schemes have never been able to make short-service refunds and are unaffected.
For some employers, the removal of DC short service refunds may remove the relative attractiveness of offering a trust based DC scheme. Currently, where a contribution refund is taken, the employer contributions remain in the scheme and can be used to cover administration costs.
Actions for the Trustees
Trustees should ensure that their administration systems and communication materials are updated to reflect the new requirements from 1 October 2015.
Scheme rules that provide for short service refunds may also need to be amended in advance of 1 October 2015 to avoid the risk of paying an unauthorised benefit.
One consequence of the change will be to potentially generate more deferred members with small DC pots and consequently potentially more transfer activity out of trust based DC schemes. Although the Government is planning to counter this with new legislation that requires small pots to follow members automatically, this is unlikely to be in place until October 2016 at the earliest.