Employers set to exploit personal accounts loophole

Employers who are seeking to avoid paying money into pensions on behalf of employees can use occupational schemes to avoid their obligations under personal accounts.

The rules for occupational schemes allow trustees to refund member contributions if they are a member of the scheme for three months or less. The employer also gets a refund of their contributions. After the member has been in the scheme for 3 months or more but less than two years, the trustees must offer:

a) a transfer value (includes the value of the member's contributions, employers contribution, investment return and effect of charges)

b) a refund of member's contributions

Once again, if the ex-member takes a refund of contributions, the employer contribution is also refunded to the employer.

Trustees must explain these two options in writing but can include a default clause that a refund will be paid if the member does not make a decision within a reasonable period.

A cash refund of their own contributions will be an attractive option for many ex-employees and some employers will seek to highlight this option. If a contribution refund is also the default option where no preference is expressed then this will also increase the number of refunds.

This method might be particularly attractive in sectors with high labour force turnover. For example, hotels and catering which has a turnover of 32.6%.

On a cumulative basis over 2 years, this means that 55 out of every 100 hotel and catering employees will leave service. If the employer can encourage a high proportion of these employees to take a refund, then their own pension costs can be minimised.

John Lawson, Head of Pensions Policy at Standard Life said, "Occupational money purchase pension schemes should have the same immediate vesting rules as personal pensions and stakeholder schemes. Otherwise, many employees will not secure pension rights, where the employer is concerned with minimising pension costs. Employers in high staff turnover sectors such as hotels, catering and retail will seek to exploit this obvious loophole."