As a further measure to boost pension saving, the DWP has announced that from October 2015 short service refunds for trust-based defined contribution occupational pension schemes for members with less than two years’ pensionable service will be abolished.
The plans coincide with wider reforms to broaden pension saving through the continuing roll-out of automatic enrolment and the introduction of automatic transfers upon a member changing employer. A consequence of this could be a further shift in employers’ preference towards contract-based defined contribution schemes, as they will no longer gain the employer contributions returned to the scheme when a short service refund was paid.
Currently, a member of an occupational trust-based money purchase scheme who leaves on or after 3 months and before 2 years of pensionable service must be offered a refund of member contributions or a cash transfer of all contributions. 20,000 short service refunds are made every year, with the continuing roll-out of automatic enrolment making the figure likely to grow. Where a refund is taken, the employer contributions remain in the scheme and can be used to cover administration costs.
From October 2015, schemes will only be able to make refunds to members if they leave within the first 30 days of membership. This new rule will ensure that money paid into a pension scheme remains invested for its intended purpose, adding to the saver’s overall pension pot. However, it is estimated that employers will, per year, lose out on £20-£40 million worth of contributions they could have otherwise used, thereby missing out on the employer contributions returned to the scheme when members took a short service refund.
The Pensions Minister, Steve Webb MP, pointed out that the change is needed to reflect the fact that today the average Briton has 11 different jobs in their lifetime, rather than spending their entire career with one employer. He said: “If people change jobs regularly and ‘cash out’ their pension each time, they stand no chance of building up a decent pension pot.”
The change only applies to trust-based defined contribution schemes; defined benefit occupational schemes are not within the scope of automatic transfers and so will still be able to make short service refunds. Personal pension schemes have never had the facility to make these refunds and are therefore unaffected.
Provision for the abolition of short service refunds was already made in section 36 of the Pensions Act 2014. The change will only apply to memberships where service begins on or after the date that this legislation comes into force, now planned to be 1 October 2015. The “run-off” period therefore means that the last refunds for those with more than 30 days’ service will potentially not be paid until October 2017.