Short-service refunds – does your scheme need to make an amendment?

Following the abolition of short-service refunds from October 2015, some defined contribution (DC) pension schemes may need to amend their rules to ensure that the scheme does not make any unauthorised payments.

15 December 2015

Under changes made by the Pensions Act 2014, members joining a DC scheme from 1 October 2015, whether it is trust-based or contract-based, will acquire rights in the scheme after 30 days of pensionable service. This aligns the position of trust-based schemes with their contract-based counterparts. A member of a contract-based scheme has a 30 day “cooling off” period after joining in accordance with FCA rules.

These accrued DC rights are not able to be refunded, and when the member leaves pensionable service they will be able either to keep the rights in the scheme, or to transfer them to another arrangement. This is a substantial change from the previous position, which was that members of occupational DC pension schemes were entitled to a refund if they had less than 2 years’ qualifying service. However, it should be noted that the changes only affect new joiners from 1 October this year. DC members who joined the scheme before 1 October 2015 and who have more than 30 days’ service will still be able to take a refund of their contributions.

The new legal requirements are not overriding, meaning that schemes may need to amend provisions around eligibility for short-service refunds, and reduce any contribution refund period to 30 days where this is “hardwired” into the rules. Scheme administrators also need to be aware of these new rules, and to ensure that they do not offer or pay refunds except in appropriate cases, as otherwise the payment will be unauthorised.

It is worth noting that the changes do not affect defined benefit schemes, which remain able to refund contributions made by members who leave the scheme with less than 2 years’ qualifying service.

A linked provision of the Pensions Act 2014 was for the framework of a system to automatically transfer members’ small DC pots to their new employer’s pension scheme when they change employment, so called ‘pot follows member’. This was intended to be introduced from October 2016; however, in October 2015, Pensions Minister Baroness Altmann announced that these plans were currently on hold due to the Government’s current focus on auto-enrolment, the state pension reforms, and DC flexibilities. There is also an inconsistency which needs to be looked at between the 30 day timeframe for a short service refund and the “one month” opt out period under the auto-enrolment provisions on which further developments are awaited.