It makes a change to have an edition of Pensions Pieces where there hasn’t been a huge raft of new legislation. There is one main development to report – the removal of short service refunds from money purchase schemes. Other than this, it is good news on the legislative front in that plans to introduce “pot follows member” and Defined Ambition have been dropped for the time being.
Short service refunds
One development since the last edition of Pensions Pieces is that, in defined contribution1schemes, short service refunds for new joiners from 1 October 2015 have been abolished. Before 1 October, scheme members (whether accruing defined benefit or defined contribution benefits) were only required to be given a right to a deferred pension on leaving pensionable service if they had at least two years’ pensionable service.
From 1 October 2015, this position has changed for new joiners who only accrue money purchase benefits, so that they gain a right to a deferred pension after just 30 days’ pensionable service. The old position still applies for members who joined before 1 October 2015, and for those who join afterwards but accrue any benefits that are not money purchase benefits or who have transferred any benefits in from another pension scheme. If a scheme has a guaranteed element or underpin benefits, legal advice should be obtained as to whether the benefits are “money purchase” for these purposes.
- The minimum position under legislation is now as follows (although, in practice, many schemes provide benefits on a more generous basis than these minimum requirements):
Click here to view the table.
- Members joining on or after 1 October 2015, with only money purchase benefits (and no benefits transferred in)
Click here to view the table.
Note that, under the auto enrolment rules, if a member “opts out” within the six week opt out period, a refund of member contributions will still be payable and the member is treated as if he or she had never joined the scheme.
Schemes with an open money purchase section will need to amend their rules to make sure that they reflect this new position. In practice, it is also likely to mean a number of smaller pots being held within pension schemes, and so it would also make sense to look further at scheme commutation rules to make sure that small pots can be paid to members as lump sums at retirement.
Pot follows member – shelved
Pot follows member (the aggregation of small member pots through automatic transfers when the member changes employer) was one of Steve Webb’s key policies which was to be implemented in two phases, starting in October 2016.
In a written statement issued on 15 October 2015, Ros Altmann, the new pensions minister, announced that pot follows member will not be introduced for the time being, due to the pensions industry needing “time and space to adjust to the other reforms underway” before it can be asked to “absorb the new swathe of regulation that would be needed to make such further reforms work effectively”. This will come as a relief to many schemes, given the additional burden that they would bear of tracing members’ past service benefits in other schemes and arranging for them to be transferred in.
However, the door remains open to revive this policy in due course, to address the problem of workers with a number of small pots due to moving between various employments.
Defined ambition and collective DC – shelved
Defined ambition and collective DC were proposals consulted on in the November 2013 DWPconsultation paper, “Reshaping workplace pensions for future generations” which explored ways in which to introduce shared risk pensions that would not be subject to the same degree of statutory protections as DB pensions.
Ros Altmann’s 15 October statement confirmed that this proposal has also been shelved for the time being. In our view, this is sensible on the basis that we are not aware of any employers that would wish to introduce benefits on a “DB light” basis, given the risk that, as happened with traditional DB, the legislative framework would move over time to incorporate greater and greater protections to the member, resulting in unsustainable cost and risk to the employer.
However, Ros Altmann told the PLSA (formerly the NAPF) annual conference that she remained interested in collective DC as a middle way and so, as for pot follows member, it is not impossible that the position will be revisited in due course.