Adviser > News > April 2011 > Should the 2 year refund rule change?
Should the 2 year refund rule change?
The DWP is looking at the rule’s interaction with automatic enrolment.
In their consultation paper called ‘Preparing for automatic enrolment, Regulatory differences between occupation and workplace personal pensions’, the Department of Work and Pensions (DWP) is looking for thoughts on the 2 year refund rule and its interaction with automatic enrolment.
What is the 2 year refund rule?
Currently, if an employee leaves a trust based pension scheme within 2 years, they can choose to get a refund of the contributions they’ve paid. The employer can also get a refund, although this money will be refunded to the trustee bank account, rather than to the employer directly. This money can then be used, for example, to offset against future contributions for the rest of the scheme membership – effectively saving the employer money.
In a contract based scheme, such as a GPP, no such refunds are allowed.
Trust vs contract based schemes
The problem with this particular aspect of arbitrage is that employers may use a trust based scheme instead of a contract based scheme for this reason alone. Indeed some providers have launched ‘master trust’ schemes citing the refund rule as an advantage over contract based schemes.
The rule and auto enrolment
It can be argued that the whole point of automatic enrolment is to get people into private pension saving to ease the burden on state benefits in the future. Even small private pension pots will go some way to mitigating the strain on the state benefits system. And if we get to the point where we have a universal basic ‘citizen’s pension’, means testing will no longer be an issue – it will always be worthwhile to save in private pensions, regardless of the size of the eventual benefit.
There’s a huge clue as to whether this rule will disappear by looking at the way that the NEST rules are written. Basically, although it’s a trust based scheme, the rules prevent any refunds of contributions using the 2 year rule.
The problem with preventing or restricting refunds is, that people move jobs over their working life. This could mean several pension pots all over the place which they might forget they even have. Automatic enrolment merely exacerbates this problem. And employers are generally not happy about looking after small pensions for people who no longer work for them. They also cost pension providers money to administer.
One answer may be to make moving pensions between jobs easier – even automatic. This has already been recommended to Government and so it might be a reality one day.
So one possible future is that with automatic enrolment and a ‘citizen’s pension’ firmly in place, pensions will move seamlessly with people when they move jobs. That way, they’ll continue to build up private pension savings that will give them non-means tested additional income on top of their ‘citizen’s pension’.
Further reading
This subject is also covered on our Retirement View blog where you can find other up to date opinion, insight and comments from our industry experts, Jamie Clark and Fiona Tait.
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