UK - The Department for Work and Pensions is to take action to stop firms using differences between defined contribution regulations to cut scheme costs when faced with auto-enrolment.
Existing rules allow workers with trust-based schemes who leave employment within two years to have their contributions refunded. The employer can then leave its contributions in the trust to offset against administration costs or future contributions.
Pensions minister Steve Webb said there was a risk some firms were signing up for trust-based rather than contract-based schemes to take advantage of this regulatory arbitrage.
He said: “The risk is that employers thinking about what they will auto-enrol their workers into might make a choice based on regulatory regime.”
Webb said the DWP would issue a call for evidence to gather ideas from the industry to make sure this does not happen
Despite this, Webb said he was keen to protect firms that legitimately use these type short service refunds to avoid administering thousands of small pension pots.
Standard Life head of pensions policy John Lawson said that some providers were looking to exploit this loophole. He said: “It’s a fairly open secret that this is being promoted.”
Lawson believes that, in the event of a ban on contribution refunds, a change to the Pensions Bill to prevent workers joining schemes in the first three months of employment could be a solution.
The legislation currently proposed allows firms a three month waiting period but gives employees the right to opt in during this time.
He said: “I think that would satisfy a lot of these employers because most of the staff turnover is within that three-month period.”
Hargreaves Lansdown head of pensions research Tom McPhail said he favoured allowing transfers to NEST as a solution to the problem.
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