UK - Short-service refunds are to be abolished, the UK's pensions minister Steve Webb has told parliament, with some inside the industry warning the envisaged 2014 ban was "very ambitious".

Announcing a number of measures, including a consultation on the consolidation of defined contribution (DC) pension pots, Webb said the Department for Work and Pensions (DWP) had achieved these "key milestones" that would allow for a "robust, efficient workplace pensions system".

Short-service refunds - whereby contributions are refunded if a member leaves a company within two years - have repeatedly been highlighted by the government as a threat to auto-enrolment reforms coming into force next year.

In late September, Webb told a conference organised by the Confederation of British Industry that they went "against the spirit" of soft compulsion.

Speaking in the House of Commons, he reiterated these concerns.

"These rules jeopardise pension savings for low to median earners and will not be part of the automatic enrolment world," he said.

Webb said that while the abolition of the refunds would create a larger number of small pots - an estimated 4.7m by 2050, according to the minister - he said the rule change could come into force as early as 2014, as long as an "accompanying solution" for pot transfers were introduced at the same time.

"So our paper seeks views and evidence from stakeholders on how we can reduce the number of small pots and improve transfers," he added, outlining possible solutions including the creation of an "aggregator" scheme where several pots could be collected, or a method whereby pots would follow employees as they changed jobs.

The consultation paper, 'Meeting future workplace pension challenges: improving transfers and dealing with small pension pots', references work undertaken by other countries to address the problem of the growing number of small pots.

It noted that Australia's government was looking to address the issue of 'lost' superannuation pots - pots that had not received a contribution in two years and the Super fund was no longer able to trace the member - had led to AUD$20bn (€15bn) saved in untraceable accounts.

The National Association of Pension Funds' director of policy Darren Philp said the announcement was a "good start" and praised Webb for his consideration not to take action on short-service refunds until pot transfers were possible.

"Steve Webb is right to say that short-service refunds should not be abolished until the problem of small pots and transfers has been dealt with.

"However, 2014 is very ambitious for dealing with this thorny issue," Philp added, saying that some of the more "radical" transfer solutions could entail significant cost and said the industry needed to work together to design a "viable" solution.

Lee Hollingworth, head of DC at Hymans Robertson, said the end of short service refunds was not surprising and should be "broadly welcomed", but that it nonetheless posed problems for some schemes.

"Having addressed the anomaly that currently exists between trust and contract, this move has created another - unlike a contract-based plan, trustees are now faced with the responsibility of administering many more small pots," he said.

"A solution needs to be found, and fast, to help scheme sponsors who are making strategic decisions right now for auto-enrolment."

Hollingworth suggested that a central pension fund should be appointed into which assets could be transferred without member consent, once they departed the trust scheme.

He noted that the "obvious" candidate for such a task would be the National Employment Savings Trust (NEST). However, it is currently unable to allow the transfer of any pension pots.

Separately, the DWP launched a review of the auto-enrolment earnings threshold, currently set at £7,500, for the 2012-13 tax year.

The consultation highlighted that, under the Pensions Act 2011, such a review would be due each year to guarantee that automatic enrolment would not occur for those who would not benefit.

In the consultation's foreword, Webb said: "In setting the band, we need to make sure we balance the amount of contributions that individuals will build up with the impact on employer costs."

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