With effect from 1 October 2015 defined contribution schemes will no longer have the ability to pay a refund of contributions to a member who leaves the scheme within two years, unless he has less than 30 days’ membership.
Background
Since 1988 members of trust-based occupational pension schemes have had to complete at least 2 years’ membership to qualify for a deferred pension. For most of that time schemes have been able to pay only a refund of the member’s contributions to a member who leaves within the 2-year period. In 2006 the law was amended to provide that members leaving with at least 3 months’ pensionable service could elect to take a transfer value (including the value of the employer’s contributions) to another pension arrangement rather than a straight refund of their own contributions.
Within a contract-based arrangement (personal pension plan) all contributions, including those funded by the employer, have always “belonged” to the individual from day one, so refunds of member contributions have never been payable. Rather there has been a 30-day “cooling-off” period, during which the individual could decide to cancel his membership as though it had never started. This is compatible with the situation under automatic enrolment, where individuals who are enrolled into a pension arrangement can opt out within 30 days and have their contributions refunded, cancelling their membership of the arrangement.
The new position
The law applying to defined contribution schemes is now changing, to bring it into line with the conditions applying to contract-based schemes and other automatic enrolment schemes so that, for members who join a scheme on or after 1 October 2015, a refund of contributions may be paid only if the member leaves pensionable service within 30 days of joining.
Note that, in relation to members joining a scheme on or before 30 September 2015, a refund will still be allowed for members leaving within 2 years (if they do not opt for a transfer value to another arrangement), so refunds under that previous legislation will actually still be payable up to, potentially, 30 September 2017.
Issues
It is worth noting also that the new restriction will not apply to defined benefit schemes, avoiding such schemes having to set up very small deferred pensions for members with very short service. Hybrid schemes – those that provide both defined benefit and defined contribution benefits – may be affected and should seek advice on the impact of the legislation.
The legislation is not overriding, so trustees should ensure that their Rules permit preservation after 30 days’ membership.
For employers this change removes one of the advantages of retaining a trust-based scheme and so we may see further migration to contract-based arrangements.