DWP research into vesting rules shows schemes defaulting leavers out

Employers are defaulting leavers into short service refunds if they do not reply to correspondence asking them if they want to remain in the scheme, according to DWP research into vesting and defaults in occupational pension schemes.

The research, carried out as the DWP grapples with the question of whether to outlaw early vesting refunds for occupational schemes, found the majority of employees opt for a short service refund rather than a transfer into a different pension scheme, even though this effectively meant that they sacrificed the employer contributions, according to DWP research. Schemes are using short service refunds to pay for the general running costs of the scheme, offset employer pension contributions, intermediary advice, reviews, or communication exercises, the research shows.

The largest employers with high staff turnover said the vesting rules played an important role in allowing them to continue to offer their employees a trust-based pension scheme rather than a contract-based pension, but some had not processed enough refunds to have considered what they might use the funds for.

The DWP research into default options found schemes’ objectives were generally to provide a safe and balanced investment option that would achieve long-term growth for the member. But there was variation in terms of how to achieve this objective. The design of the default fund depended largely upon when the trustees and intermediaries last formally reviewed the fund’s objectives and design. Less knowledgeable trustee boards with smaller employers had often not formally reviewed the default option for years. Employers in this group were typically invested 100 per cent in equities, and many of these were invested in the UK only.

But the research found default options in trust-based DC pension schemes have changed significantly over the past ten years. The typical asset allocation has developed from funds that were invested entirely in equities and often in just one country, to a wider range of asset classes with wider geographical diversity. The typical lifestyling period also appears to have been increasing from five years to ten years or longer.

Providers and intermediaries typically felt that the changes seen in default fund design over the last ten years would be likely to continue. Further changes were expected tohappen in several areas, including a more flexible lifestyling process that reflects the current trend towards flexible retirement, increased protection against stock market falls and changes likely to be brought about by Nest, including the possible use of target date funds.