Abolition of DC short service refunds from 1st October 2015

From 1 October 2015, individuals joining a DC occupational pension scheme will only be entitled to a refund of contributions if they leave the Scheme with less than 30 days’ qualifying service. This article discusses the implications of this change and the steps that may need to be taken by trustees and employers. 

14 September 2015

At present, individuals who leave an occupational pension scheme with less than two years’ qualifying service have a statutory right to receive a refund of the contributions they have paid to the scheme. This is known as a ‘short service refund’.

From 1 October 2015, the position will change for members of defined contribution (DC) schemes or arrangements. DC members will only be entitled to a refund of contributions if they leave with less than 30 days’ qualifying service, tying in with both the time a member has to opt-out of auto-enrolment and the cooling off period applicable to contract-based personal pension arrangements. After 30 days’ qualifying service, DC members’ benefits will be preserved in the scheme and will be paid on retirement in the usual manner. Any short service refund after 30 days will be an unauthorised payment for tax purposes.

This change will only affect those joining a DC scheme or arrangement from 1 October 2015 and whose only benefits under the scheme are DC in nature. Members of DB schemes or of hybrid schemes with both DB and DC benefits, and those who join DC schemes before 1 October will remain entitled to a refund on leaving with up to two years’ qualifying service.

The stated intention of the change is to align the position for members of DC occupational pension schemes more closely to that of members of personal pensions and to ensure that pension contributions remain in schemes to be invested to provide a retirement income.

Trustees and Employers of DC schemes and arrangements expecting new members from 1 October 2015 should consider the impact of this change on their scheme documents and procedures. Where scheme rules include a right for a member to receive a refund of contributions on leaving with up to 2 years’ qualifying service, an amendment is likely to be required to remove this right for new joiners from 1 October 2015 and reflect the revised statutory position. Member communications (booklets, joining information etc.) may also need to be updated to ensure that new joiners understand their rights and entitlements on leaving service with both less and more than 30 days’ qualifying service.