Adviser > News > July 2011 > Levelling the automatic enrolment playing field
Levelling the automatic enrolment playing field
The future of the short service refund rule.
In January 2011, the Department for Work and Pensions (DWP) issued a consultation paper "Preparing for automatic enrolment – Regulatory differences between occupational and workplace personal pensions."
Download the consulation response
The recently published response to that consultation will have a major impact on the corporate pensions market both now and in the future.
Read on to find out why.
Short service refunds
Trust-based occupational pension schemes can offer a refund of employee and employer contributions paid – generally if the employee leaves the scheme within two years. Contract-based workplace pension schemes (such as Group Personal Pensions) cannot.
It’s worth noting that the DWP are only considering the rules in Defined Contribution (DC) schemes. It is highly unlikely any of the following will apply to Defined Benefit (DB) schemes.
The problem
This means that, under automatic enrolment:
- employers may be encouraged to use a trust-based scheme as it is effectively cheaper (some providers have launched or re-launched ‘master trust’ products as a result)
- more employees could end up with a refund instead of building up a pension fund.
Government response
- "... the arguments presented that employers are making decisions about scheme type specifically to take advantage of short service refund rules are a real concern."
- "Further...we are not convinced by the argument that short service refund rules could support the objective of increasing pension saving."
The result
The DWP have said that they will perform further analysis on this subject before they make a decision on short service refunds but in the meantime:
- "Since our priority is to help more people save more for their retirement, we would encourage employers not to make their decisions about scheme type on the assumption that short service rules will continue to exist in their current form."
Small pension pots
Small pension pots primarily build up in Group Personal Pensions as there is no facility to offer a refund of contributions for short term members.
The problem
With automatic enrolment, there will be more small pension pots in the system as people move jobs. This is a major issue.
The DWP predicts up to 200,000 small pension pots of less than £2,000 will be generated each year after 2017 under automatic enrolment. If short service refunds are banned or changed as above, it would increase this number.
Administering all these pots would cost money, lots of money. That is why any decision on short service refunds must go hand-in-hand with the small pension pots problem.
Government response
- "We do not want to see a situation where individuals amass numerous small pension pots as they move from employer to employer, only to find that these pots are stranded and they are unable to purchase a worthwhile annuity."
The result
Various solutions to this issue have been suggested – for example an easier or automatic transfer system when people move jobs, or forcing NEST to accept all small pension pots.
The DWP is considering all the options and aims to publish its final response later in the year. It does seem clear however that they will focus on transfers:
- "Action on short service refunds should therefore go hand in hand with a view on how to improve the transfer process"
- "Our full response in the Autumn will consider short service refunds and transfers together, in the context of enhancing the whole pensions landscape."
Other regulatory differences
Those raised included scheme governance, trivial commutation, the Transfer of Employment (Pension Protection) Regulations and the RDR.
Whilst the DWP recognises these as potential issues, they are largely being looked at elsewhere and so little detail is given on these.
Our view
We have long lobbied for a level playing field across all types of pension provision under automatic enrolment, including NEST (which incidentally will not offer short service refunds) so we welcome the DWP’s views and agree with its concerns.
We think that short service refunds should either be banned completely or changed to one year instead of two, and/or a cap set – such as £1,000 - over which no refunds may be made. We believe this would satisfy the Government’s stated policy intentions.
We support the automatic transfer of small pension pots of a certain value (say £2,000) between employments. This will make schemes more efficient as small paid up pots are a drain on administration and cost resource.
Ultimately, it doesn’t really matter about the fine detail, as long as all types of pension scheme are treated the same in an automatic enrolment world.
Further information
If you have any queries, comments or views on the above information please email PensionsReform@scottishlife.co.uk.
To find out more about our group pension arrangements, speak to your usual Scottish Life contact or call us on 0845 60 50 40.
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