LOCAL GOVERNMENT PENSION SCHEME

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1 LOCAL GOVERNMENT PENSION SCHEME EMPLOYER S NEWSLETTER NUMBER 78 ATTACHMENT Employer s guide to early retirement (employer s consent, flexible, redundancy and efficiency) This guide is to the types of early retirement (excluding ill health). It provides an explanation of the benefits payable to members and the costs to employers. This guide needs to be read in conjunction with your employer s discretionary policies for retirement, redundancy and efficiency payments. Admission Bodies, Town and Parish Councils are advised to contact the Pension Section before commencing any premature retirements. Admission Bodies should also have regard to the clause in your admission agreement in respect to premature early release of benefits where there is an employer shortfall cost. To request an estimate for any type of retirement or inform us of a member who is retiring, please use the forms that can be found on the employer s part of our website. Background The normal retirement age for everyone in the Local Government Pension Scheme (LGPS) is age 65. Members can choose to take their benefits at any point from age 60 right up to just before their 75 th birthday. Benefits will be reduced if they are taken before age 65. However: - Those members who attain age 60 by 31 March 2016 and meet the 85 year rule before 31 March 2016 may qualify for benefits built up to 31 March 2016 without reduction. - Those members who, during the period 1 April 2016 to 31 March 2020, attain age 60 and meet the 85 year rule by 31 March 2020 may not have a full reduction. The benefits payable to these members will be reduced in accordance with a tapering scale. The reduction in benefits may be greater where retirement is closer to 31 March

2 If members leave work before their 60 th immediate payment of their benefits if: birthday, they will only be entitled to their employer agrees and they are age 55 or over. The four main types of early retirement before age 60 (excluding ill health) are: early with employer s consent (includes compassionate grounds) redundancy business efficiency flexible retirement In the majority of cases, agreement to these types of early retirements will result in the employer paying a strain charge (sometimes referred to as a shortfall cost) to the Pension Fund. Employer costs To understand why an employer strain charge is made for early retirements, it helps to have an understanding of how benefits are funded. Money is invested now (contributions from employers and members) to provide enough money in the future to pay out benefits. To work out how much is needed now, the Actuary needs to know when in the future the benefits will be paid - so assumes everyone in the scheme will retire at the normal retirement age of 65 (or when they qualify for unreduced benefits between age 60 and 65). Where benefits are paid before rmal Retirement Date (NRD) they are paid earlier and therefore for longer. This gives rise to a shortfall in funding which is referred to as a strain on the Pension Fund. Employers are required to make additional payments to meet the cost of the strain on the Pension Fund. In some cases the member may receive actuarially reduced benefits (early with employer s consent where they have not met the 85 year rule) and so the amount of the strain charge needed will be less, as part or all of the cost is met by the reduction in benefits to the member. The flowchart overleaf shows how the cost of early retirement is shared between the member and employer. 2

3 Employer cost flowchart Sharing the cost of early retirement under age 60 Will the member be age 55 or over when they leave? Is the member being made redundant or leaving in the interests of efficiency? As the member is under 60 has the employer consented to the early payment of pension benefits? Does the member meet the 85 year rule and are they fully protected from its removal? Employer pays redundancy payment (or efficiency payment in line with employer s policy) and the full strain charge Employee receives unreduced benefits and employer pays full strain charge Employee receives reduced benefits and employer pays remaining strain charge The benefits are not payable until age 60 at the earliest. If the 85 year rule is not achieved benefits may be reduced. Is the member being made redundant? Employer pays redundancy payment. Pension benefits are preserved. Pension benefits are preserved The types of retirement are explained in more detail below. Early with employer s consent (under age 60, compassionate or flexible) If a member is granted early retirement with employer s consent: they are entitled to immediate payment of their benefits built up to date the member may suffer an actuarial early payment reduction (if applicable) 3

4 the employer may waive this reduction for compassionate or flexible retirements, if they have a policy in place to do so (but for flexible retirements the employer will then pay a larger strain charge to the Fund to cover the difference). The member will receive unreduced benefits if they achieve the 85 year rule and are fully protected from its removal. 4

5 Redundancy If an employee is made redundant and they are age 55 or over: they are entitled to immediate payment of their benefits built up to date there is no reduction for early payment they are entitled to a statutory redundancy payment of up to 30 weeks pay, based on their age and length of service they may be entitled to an enhanced redundancy payment of up to 104 weeks pay, based on their employer s policy*. The costs to the employer in cases of redundancy are the sum of the strain charge and the redundancy payment. If the employee is made redundant and is under age 55 then they will only be entitled to the redundancy payment. Their pension benefits will be deferred until they reach at least age 60. Statutory redundancy pay is calculated as up to 30 weeks pay, depending on age and length of service. The statutory weekly pay amount is limited to a maximum amount set each year (increased each February in line with inflation) but employers can choose to use actual weekly pay when this exceeds the statutory amount. Efficiency If an employee is retired on the grounds of business efficiency and they are age 55 or over: they are entitled to immediate payment of their benefits there is no reduction for early payment The costs to the employer in cases of efficiency are the sum of the strain charge plus the cost of any augmented service or additional pension awarded to the employee. * Certain employers have the discretion to enhance the redundancy payment in two ways: (i) use actual pay instead of the statutory maximum (ii) pay up to 104 weeks pay for redundancy or efficiency termination in line with their policy 5