The abolition of the statutory right to short service refunds from 1 October 2015 means all members of trust-based defined contribution (DC) occupational pension schemes who leave their scheme after completing at least 30 days’ pensionable service will be granted deferred benefits. Members with pensionable service of 30 days or more will no longer be able to get a refund of their contributions. Members of final salary schemes and existing DC scheme members will be unaffected and will continue to be eligible for refunds of contributions if they have been in pensionable service for less than 2 years – the abolition only applies to members who join (or re-join) a DC scheme on or after 1 October 2015.
The legislation bringing this change into effect is not overriding, therefore trustees must consider whether their scheme rules need to be amended. Some rules are worded such that members have a right to a non-statutory contribution refund, but payment of a refund when it is no longer permitted means it would be an unauthorised payment for tax purposes and would result in adverse tax consequences.
Potential unauthorised payments
Some schemes contain a discretion for the trustees to decide whether or not to pay an unauthorised payment. This may allow trustees to refuse to pay a non-statutory contribution refund (in circumstances where members have a right to a refund under the scheme rules) until the rules have been amended.
Trustees should review their scheme rules as soon as possible in order to determine whether any amendments are required so that any necessary amendments can be made before 1 October 2015. Member communications and booklets should also be examined to ensure that members are given the correct information when they first join the scheme to avoid creating incorrect expectations.