Press release

Publication of DWP research report no. 725 the use of vesting rules and default options in occupational pension schemes

This news article was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Findings of research exploring the use of vesting rules and default options in occupational pension schemes.

Today, the Department for Work and Pensions publishes the findings of research exploring the use of vesting rules and default options in occupational pension schemes.

The research was undertaken to understand how vesting rules are currently used and how this may change after the implementation of the workplace pension reforms. It also aimed to understand how default options in occupational pension schemes are currently used. The research comprised of qualitative face-to-face individual depth interviews with a range of intermediaries, pension providers and employers with occupational pension schemes. The research was conducted by RS Consulting on behalf of DWP.

The main findings are:

Vesting

  • Pension providers, intermediaries and employers reported that upon leaving a scheme, most employees opt for a short service refund rather than a transfer into a different pension scheme. That is, they have their own pension contributions refunded to them whilst the employer’s contributions are returned to the scheme.

  • Only employers with over 1,000 employees and smaller employers with high staff turnover typically processed enough short service refunds to accrue a large enough pot to be able to usefully use the funds.

  • Uses for funds accrued by short service refunds included: paying for the general running costs of the scheme, offsetting employer pension contributions and intermediary advice, a review, or a communication exercise.

Default Options

  • The objectives of the pension scheme default options were typically to provide a safe and balanced investment option that would achieve long-term growth for the member.

  • Where the fund had been set up or reviewed in the past three years or so, there was more variation in the types of pension investments between employers. This meant investing in differing proportions of equities versus safer investments such as bonds.

  • Intermediaries, who broker between employers and pension providers, typically considered the profile of the workforce in designing the default option, taking into account factors such as trustees’ views as to their workforce’s attitude to risk, employee turnover, contribution levels and salary, job role and industry sector and the age profile of the employees.

  • Within the schemes’ trustee bodies, there were no formalised processes for setting out who was responsible for designing, operating and winding up the default option. As a result these tasks are often allocated on an ad hoc basis.

Notes to Editors

  1. DWP Research Report No. 725 “The use of vesting rules and default options in occupational pension schemes” is published on 1st March 2011 by Corporate Document Services. The research was conducted on behalf of DWP by Andrew Wood, Peggy Young and Dominika Wintersgill at RS Consulting.
  2. Free summaries are available from Paul Noakes at the DWP Social Research Branch (3rd Floor, 3rd Floor, Caxton House, Tothill Street, London SW1H 9NA.). The reports and summaries are available free on the DWP website http://www.dwp.gov.uk/asd/asd5
  3. The research consisted of 41 face-to-face individual depth interviews with a wide variety of intermediaries, pension providers and employers with occupational pension schemes.