22 September 2006
A survey published in the journal Occupational Pensions reveals
that occupational pension schemes are taking steps to avoid new
rules that will involve months of administrative hassle and
potential losses for departed employees.
New legislation, effective from April 2006, requires that where
a worker quits a scheme after three months, but before two years,
they must be offered the choice of a refund of their own pension
contributions or a potentially more generous transfer of their fund
to another scheme. However, once members are entitled to a
preserved pension in the scheme (which could be before they have
completed two years' service) they do not have to be offered a
refund.
Previously early leavers would only be entitled to a refund of
their contributions (if that) under the law, though some scheme
rules already allowed a transfer or offered a preserved
pension.
The Regulations, introduced by the Pensions Act 2004, the
Occupational Pension Schemes (Early Leavers: Cash Transfer Sums and
Contribution Refunds) Regulations 2006 (SI 2006/33) and by the
Pensions Regulator's code of practice no.4, also require that
pension schemes comply with demanding communication requirements,
which force pension administrators to wait at least three months
while ex-employees in this position decide which option they would
like to take. This is more complex than the previous arrangements,
where refunds could simply be given to the employee on leaving.
"Although they are well-meaning, the problem with these
requirements is that they will be very difficult for many schemes
to carry out, especially in companies where staff turnover is
high," said Charlotte Wolff, author of the report.
"Nowadays many employees, especially younger ones, leave a job
after a short stay, often to go abroad. If the pension
administrators are unable to track them down, there could be a long
delay before ex-employees receive their refund, if ever."
In order to avoid administrative hassle, 14% of the affected
schemes in the Occupational Pensions survey have already changed
their rules so that members become entitled to a preserved pension
after three months. This means that communication requirements
become far less stringent and there is no need for the pension fund
administrator to provide a refund or immediate information about a
transfer value. It is possible that other occupational pension
schemes will follow suit.
Charlotte Wolff said: "The legislation was introduced to
encourage members to build up pension rights rather than take a
refund. Schemes that reduce this waiting period will be helping
members to do this, but there are concerns that where the choice of
a refund or transfer remains, both pension administrators and
employees could lose out."
A further finding of the report is that, when given a choice
between a refund and a transfer, the majority of early leavers
choose a refund - even if the transfer is potentially more
generous. Prior to April when the legislation came in, 10 schemes
in the survey already gave members this choice, but in a majority
of cases less than 5% of members took the transfer.
Charlotte Wolff said: "It seems unlikely that many early leavers
will take advantage of the attractive new right to keep the pension
rights they have already built up unless employers or pension
managers take the time to educate workers about the long-term
benefits of saving."
