Trustees and sponsors of workplace defined contribution schemes need to review their scheme rules, administrative processes and member communications to reflect the abolition of short-service refunds on October 1.
DC members joining a scheme on or after October 1 2015 with more than 30 days’ qualifying service will no longer be able to take a short-service refund from their workplace scheme.
Pre-October 1 members
What is the position for active DC members who joined the scheme prior to October 1 2015?
The changes will not apply to members who leave pensionable service on or after October 1 2015 but who joined the scheme prior to that date.
Existing legislation will continue to apply and therefore they will continue to be entitled to short-service refunds if they leave pensionable service with at least three months' but less than two years' qualifying service.
What is the position for new DC members with a pre-October 1 2015 period of DC membership?
If the member received a short-service refund or made a transfer in respect of the previous period of membership of the scheme, the new rules will apply in the same way as for those who are brand new members on or after October 1 2015
If the previous period of membership counts towards the member's qualification for benefits, then the new requirements will not apply.
Source: DLA Piper
Currently, members who have at least three months’ but less than two years’ qualifying service can opt to receive a refund of their employee contributions – known as a short-service refund – or transfer their benefits.
The shift in legislation will reduce the period of qualifying service required for members to be entitled to reclaim DC benefits to just 30 days.
The change comes as part of a broader push to boost pension savings and will ultimately coordinate with government plans for the aggregation of small pension pots – known as pot-follows-member.
Trustee action points
Matthew Swynnerton, partner at law firm DLA Piper, said trustees need to review their scheme rules in light of the change in order to avoid making unauthorised payments further down the line.
He said: “The new provisions aren’t overriding… Therefore the fact the legislation is changing doesn’t automatically filter through to the rules.
“Some rules will be different and will refer to the actual legislation, but more often than not we’re finding most schemes, even if they do refer to the legislation, will do so in a way that perhaps doesn’t perfectly flow through and some changes will be needed in order to reflect the new rights.”
Swynnerton said administrative processes and member communications also need to be updated.
Martin Willis, associate at consultancy Barnett Waddingham, said the upcoming change will place an additional administration burden on trustees over the short term.
It’s an under-the-surface issue that’s going to have a significant impact and drive change, but it may take six to 12 months for employers to realise costs are rising and take explicit action
Neil Latham, Punter Southall
“[There will be] lots of people floating around with very small benefits, which isn’t great from an admin perspective,” he said.
Employer impact
When an employee leaves within a two-year window and opts to take a refund, all employer contributions accumulated during their service remain within the scheme.
Many employers currently use contributions left within the scheme in accordance with scheme rules to cover future contributions or meet administration costs.
Employers could therefore see an increase in overall expenditure as short-service refunds come to an end.
Willis said: “The short-service refund legislation allowed employers to effectively offset those [contributions] that didn’t go the employee.
“Some employers might [have seen this] as a reason to choose a trust-based DC scheme over an alternative and, going forward, particularly with all the other additions to trust-based DC, it is becoming more onerous and might drive employers away.”
Neil Latham, principal at consultancy Punter Southall, said the impact of the change will take a few months to filter through.
He said: “It’s an under-the-surface issue that’s going to have a significant impact and drive change, but it may take six to 12 months for employers to realise costs are rising and take explicit action.”
