“What on earth is a ‘short service refund’?” asks Ferdinand Lovett, a senior associate at Sackers, in his latest blog addressing how to talk about pensions in public
The scene: a nice summer drinks reception. The interlocutor: a barrister who was three Pimms down and showing no signs of slowing.
“I mean, in all the years of instructions to me, I’ve never had to advise on them”, the barrister said as he moved into the phase of gently spitting scintillas of crispy canapes over me.
I explained that short service refunds allow members of trust-based schemes to receive a refund of their contributions if they leave the scheme with between 3 months and 2 years of “qualifying service”.
“And?”, he said.
Not working out if the interest was feigned or genuine, I filled in Anon QC that, broadly, if you join a DC trust-based scheme from 1 October 2015 onwards, it will no longer be possible for the scheme to offer a short service refund.
Benefits will instead “vest” at law after 30 days of “qualifying service”: from that point a member cannot extract cash from the scheme on the basis that they are leaving early, but will earn the right to have their DC pot maintained until retirement, transfer or death.
“What happens if I quit my job in the first month?”, came the razor sharp response.
This is where the changes to short service refunds are meant to mirror the auto-enrolment regime, where the law allows a one month opt-out window during which a new member can unwind her membership and receive a refund of her contributions.
The 30 day “qualifying service” limit/vesting threshold is designed to help schemes that operate enrolment through the employment contract by allowing them to have rules that cancel membership in a 30 day window and refund contributions to members i.e. offer the same flexibility that would apply in Pensions Act 2008 statutory enrolment.
“Ah yes, auto-enrolment, I’ve heard of that!”, joked (I think) my companion. “And what if I join on 30 September?”, the cross-examination continued mid-Pimms.
The way the new law was drafted means that members who join affected DC schemes prior to 1 October 2015 are not affected by the changes and will retain the right to take a short service refund for up to two years (if the rules of the scheme allow).
Some employers will already need to have thought about the change in law as they may use postponement to delay the admission of new recruits into a pension scheme: if that postponed date is 1 October or later, the new rules will apply and short service refunds won’t be an option any more.
Trustees of DC schemes equally need to be aware of the change in law, working out whether any rule changes are needed and updating member communications and booklets to reflect the new vesting provisions for members joining from this October onwards.
A third person had pitched up at our corner of the drinks party and so I sensed the need to wrap up the chat on this topic. The mini fish and chips loomed into view. I grabbed one and made my excuses.
Ferdinand Lovett is a senior associate at Sackers