Changes to Short Service Refunds on DC Occupational Schemes

24 September 2015
The Government is changing the rules for short service refunds on DC occupational schemes from 1 October 2015. 

What is changing for short service refunds?

Currently individuals who leave their occupational pension scheme with less than two years pensionable service have a statutory right to a refund of contributions.

From 1 October 2015 individuals who first join a defined contribution (DC) scheme, or rejoin a DC scheme after having taken a refund or transfer, will only be entitled to a refund of contributions if they have less than 30 days pensionable service.

Members of defined benefit (DB) schemes and DC members who join before 1 October are unaffected by the change and will continue to be eligible for a refund of contributions if they leave the scheme with less than two years pensionable service.

Why is the Government making this change?

The Government is keen to make saving for retirement through a pension the norm. Contributions need to remain invested to produce a retirement income, but allowing a refund of contributions runs contrary to that.

The Government is also keen to remove the regulatory arbitrage between DC occupational schemes and contract based arrangements.  An individual taking out a group personal pension (GPP) can only cancel the plan and receive a refund of contributions within the first 30 days.

Individuals automatically enrolled into a DC occupational scheme or a GPP arrangement can only opt out within the first month.  This change harmonises the rules for opt outs and refunds of contributions for all cases.

What the scheme trustees need to do?

The trustees need to review the scheme rules to see if an amendment is required.  The rules may still allow a non-statutory refund to be paid after the change comes into effect if a refund of contributions has been explicitly hardcoded into the rules.  Such a payment would be an unauthorised payment and liable to tax.

They also need to review member communications.  They are likely to need updating for new joiners and rejoiners to the scheme on or after 1 October to reflect the change to the rules around short service refunds.

About the author

Robin Nimmo

Strategic Insight Manager

Robin has worked for Royal London for over 25 years with experience in marketing, research and product development.  He currently specialises in the at retirement market.

Last updated: 20 Nov 2015

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