Occupational DC pension scheme 'short service refunds' to end in October 2015

Out-Law News | 23 Oct 2014 | 5:33 pm | 2 min. read

Members of occupational defined contribution (DC) pension schemes who leave an employer after less than two years of service will no longer be able to take a 'short service refund' of any contributions they have paid into that scheme from October 2015, the UK government has announced.

Measures to end the practice were included in the 2014 Pensions Act, but the government had not previously announced when they would come into force. The move comes ahead of plans to introduce automatic 'pot follows member' transfers of pension savings when workers change jobs, and will affect around 20,000 employees each year, according to government estimates.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, welcomed the government's early announcement of the changes, but said that introducing automatic transfer arrangements would require considerably more work from scheme trustees and pension providers.

"Trustees of occupational pension schemes will be pleased that the government has made this announcement well in advance," he said. "This will give them time to review the information they provide to new members, and to update their administration systems."

"The abolition of short service refunds will lead to more small DC pots. The government had originally planned to implement its proposals for automatically transferring small pots at the same time, in order to deal with these additional small pots. However, it is doubtful whether automatic transfers could be introduced by next October: while it is relatively easy for trustees to deal with the abolition of short service refunds, automatic transfers will require additional complex administration systems that will be somewhat more tricky to set up," he said.

Currently, members of occupational pension schemes who leave their job having completed more than three months but less than two years of qualifying service may be entitled to receive a short service refund. In some cases this is optional, but employers can insist on the refund being taken or the member transferring their pension contributions to another scheme when they leave that job.

Since October 2012, larger employers have been required to automatically enrol qualifying employees into an occupational pension scheme which meets certain minimum requirements. Smaller employers will become subject to the same requirement at staggered 'staging dates' running until 2018. The practice is expected to increase the number of short service refunds paid out by DC pension schemes used for automatic enrolment.

Once short service refunds are abolished, occupational pension scheme members may only have their contributions refunded during the 30 day 'cooling off' period immediately on joining the scheme. This will roughly equalise the position of occupational schemes and personal pension schemes. Short service refunds will still be available to members of defined benefit (DB) schemes, as these will not initially be included within the scope of the automatic transfer mechanism.

The change will only apply to employees who join a DC occupational pension scheme from October 2015.

Steve Webb, the pensions minister, said that the new rules would reflect the "reality" that the average adult will now have 11 different jobs during their lifetime.

"If people change jobs regularly and 'cash out' their pension each time, they stand no chance of building up a decent pension pot," he said. "By abolishing short service refunds and developing plans for automatic transfers to help people keep track of their savings, this government will build on its excellent record of helping millions of people save more for a brighter, more comfortable retirement," he said.