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Don’t scrap short-service pension refund, says NAPF

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The National Association of Pension Funds (NAPF) has called on the Government not to scrap short-service refunds for trust-based pension schemes.

The refunds allow staff to receive their pension contibutions back if they leave an organisation within two years of joining. Darren Philp, NAPF director of policy, said:

"Scrapping short-service refunds would leave employers with lots of tiny pension pots that could cost more to administer than they are worth.

"That would only spur more employers to ditch trust-based schemes for contract-based, with the weakening in governance which that entails. One in five told us they might do this. "The 'governance vacuum' in most contract-based workplace pensions is one of the biggest long-term risks facing pension saving. This is a much greater problem than short-service refunds, and should be the Department for Work and Pensions (DWP)'s first focus.

"If the DWP is concerned about the way master trusts are being marketed, it should improve their regulation, rather than changing long-established rules on refunds. Nine out of 10 of our members said they wanted to keep short-service refunds post auto-enrolment.

"It is a bad idea to make policy now based on assumptions about employer behaviour that may not be true. It would be more sensible to look at refunds when the National Employment Savings Trust (NEST) pension is reviewed in 2017.

"The Government must find ways of improving and encouraging transfers to reduce the number of small pots and to help people manage their pension savings."

The NAPF ran a snapshot survey of its members with open trust-based schemes. There were 74 responses. Some 89% make use of refunds and in the average scheme, 10% of members left before they had been in the scheme two years and so were eligible for a refund. The average refund was around £750. The survey also found 87% of respondents with an opinion said schemes should be allowed to continue to give refunds after auto-enrolment has been introduced.

These schemes were then asked why they thought refunds should continue:

  • 95% said that their scheme would be left with large numbers of small pots that would be burdensome to administer
  • 60% believe that their scheme is already dealing with large amounts of regulatory change and the Government should not be adding to this
  • 53% want refunds to be kept, as they are popular with scheme members
  • 53% believe that refunds should be kept to stop employer costs rising
  • 21% believe that their employer might close the trust-based scheme and move to a contract-based scheme if refunds are stopped