Section 17 - Types of member retirement and pension estimates

Once a member of the Scheme notifies you they are leaving or you, as the employer, notifies the member that their contract is being terminated, a leaver form should be sent to Southwark Pension Services at the earliest opportunity via the post using the contact details on the website.

Under the Pension Administration Strategy (PAS), employers are requested to provide the leaver’s data 15 days before the member leaves employment. Where this is not possible, it must be provided within five days of the member’s final payday (corrected/amended leaver data can always be provided by submitting a new form). The Fund has the right to charge additional costs to employers who do not meet this timescale.

The leaver form will show the reason for leaving, along with the relevant pay details that will allow Southwark Pension Services to calculate the pension benefits, to be paid either straight away if the member is retiring, or deferred (preserved) benefits if they are not eligible for retirement benefits at that time.

If the reason for leaving is an employer driven retirement, then any relevant paperwork, such as ill-health certificates or authorisation forms will need to be sent with the leaver form to Southwark Pension Services. Southwark Pension Services will not be able to process any benefits without the correct paperwork.

Under the Local Government Pension Scheme (LGPS) 2014, the normal retirement age (NRA) for members is their State Pension age (SPA) or age 65, whichever is later. A minority of members may have slightly earlier retirement ages through various protections. As these protections are only applicable to a minority of members, which will reduce further over time, this guide will assume that NRA is (SPA) minimum 65.

The LGPS offers several types of retirement, which can normally be described as either ‘member driven’ or ‘employer driven’:

Employer driven

• Redundancy/efficiency; and
• Ill-health retirement.

Member driven

• Normal age retirement;
• Late retirement; and
• Early voluntary retirement (however, if the employer is intending to waive any actuarial reduction or switch on the 85-year rule protection, then it becomes employer driven).

The exception is flexible retirement – this is normally requested by the member, but it requires employer’s consent.

In any case of potential employer driven retirement, you are advised to obtain an estimate of benefits from Southwark Pension Services to determine any strain cost that you may need to pay. This will ensure you are able to budget correctly for when you receive an invoice requesting payment of the strain cost. Members cannot request an estimate for employer driven retirements.

Under the LGPS Regulations, if a members employment ceases due to redundancy or efficiency, (i.e. the employment is terminated by mutual consent on grounds of business efficiency), and the member is age 55 or over, and are deemed to have had at least two years’ pensionable service, the member is entitled to, and must take, their pension benefits immediately without any actuarial reduction.

The member must also take their pension benefits from additional pension contribution contracts although the amount will be reduced on redundancy/efficiency retirement.

In most cases of redundancy/efficiency, there will be a strain cost to you as the employer. Therefore, you should always ask for an estimate from Southwark Pension Services in any cases where the member would be age 55 or over at the date of their employment ceasing.

Meaning of business efficiency grounds for retirement

The Scheme Regulations themselves do not include a definition of business efficiency and there is not a general law definition that the employer could rely on either. It will therefore be each employer’s responsibility to interpret what is meant by business efficiency within their organisation.

When considering this, you need to bear in mind that, if a member over age 55 is dismissed or their employment terminated by mutual consent and the employer determines that it is not a redundancy or business efficiency situation, you could be challenged by the individual on this matter and they can take their case to The Pensions Ombudsman, or to an employment tribunal, who may take a different view.

A member can be retired on ill-health grounds if they’re medically certified as being ‘permanently incapable of discharging efficiently the duties of his or her current employment’.

The LGPS provides three levels of ill-health retirement benefits; depending on how likely it is that the member will be able to work again before retirement age. These three levels are known as Tier 1, Tier 2 and Tier 3.

It is, and always has been, the employer who decides if a member qualifies for ill-health retirement and which tier applies; but in doing so, you must have regard to the advice of a doctor qualified in occupational health medicine. This decision should be made only on medical considerations, based on a doctor’s certificate. Economic considerations (such as the availability of work) should not be taken into account.

If a potential ill-health retirement arises, you need to complete the front page of the ill-health retirement certificate and refer the case to your approved occupational health service to arrange an appointment to review the member’s health. OHS will then provide you with a detailed report with their considered opinion and complete the rest of the certificate and return it to you.

Taking into account the occupational health doctor’s opinion, you must decide if the member meets the criteria for ill-health retirement or not, and if they do, what level of benefits are to be awarded. You will then need to complete the form with your decision and send it together with a completed leaver form to Southwark Pension Services for processing.

Members who meet the criteria for ill-health retirement, will need to be awarded one of the following levels of benefits, according to the severity of their medical condition:

• Tier 1 - this tier applies to the more serious cases of ill-health, where the member has little prospect of obtaining gainful employment before their normal retirement age. Immediate benefits would be payable. In calculating them, the member’s Scheme membership/earnings (Assumed Pensionable Pay) would be projected to their normal retirement age (NRA).
  There is no further action for employers once Tier 1 benefits have started to be paid. The pension is not reviewed and not time limited.
• Tier 2 - this tier applies to members who have little prospect of obtaining gainful employment within the next three years but are likely to be able to do so before their NRA. Immediate benefits would be payable. In calculating them, the member’s Scheme membership/earnings (Assumed Pensionable Pay) would be increased by 25% of their remaining service to their NRA.
  As with Tier 1, there is no further action for employers once Tier 2 benefits start to be paid. The pension is not reviewed and not time limited.
• Tier 3 - this tier applies to members who have little prospect of obtaining gainful employment straight away but are likely to be able to do so within the next three years. Immediate benefits would be payable, but there would be no award of extra membership. This award must be reviewed after 18 months and will only be paid for a maximum of three years.

If a member is granted Tier 3 ill-health benefits you will need to provide the member with the following information upon leaving employment, by stating in the leaver letter that:

• The pension will be reviewed after 18 months to confirm any change to the medical condition of the member;
• The member must inform the previous employer, i.e. you, if they obtain gainful employment (30 hours or more per week for a period of not less than 12 months) as the pension will cease; and
• The pension will only be paid to a maximum of three years.

Unlike Tier 1 and Tier 2 benefits, your responsibility continues with a Tier 3 benefit. You are responsible for the following processes once a Tier 3 pension is in payment:

• Review the medical condition of the member at the point the pension has been in payment for 18 months, by referring them back to the IRMP at your OHS for re-assessment, and if the condition of the member is certified as remaining the same, you must inform Southwark Pension Services that the Tier 3 pension conditions still apply;
• Inform Southwark Pension Services at any time when the pension must cease, such as the member obtaining gainful employment during the three-year period, or medical re-assessment has established the member is able to gain other employment;
• Inform the member in writing when the pension is ceasing;
• Inform Southwark Pension Services if they need to recover an overpayment of pension; and
• Inform Southwark Pension Services if the member has been re-assessed and it has been certified there is a deterioration in their original condition, and you have agreed to uplift their pension to a Tier 2 ill-health pension. A copy of the new OHS-IRMP report and new medical certificate is required by Southwark Pension Services to confirm and calculate the uplift to the member’s benefits.

To assist you with Tier 3 cases, Southwark Pension Services can:

• Inform the employer when the member has been on pension for nearly 18 months so you can carry out the necessary checks and will confirm the member’s current home address held on the pension administration record;
• Inform you when the member has been on pension for nearly 36 months and confirm the member’s current home address held on the pension administration record. Southwark Pension Services will be seeking confirmation from you that the pension should cease to be paid at 36 months; and
• Recover any overpayment as instructed by you.

• Members who were active members of the 1997 Scheme and aged 45 or older on 31 March 2008, would receive the membership increase that would have been awarded under the 1997 Scheme if this would be greater than the 2008 Scheme award. The extra benefits, however, would be based on the 2008 Scheme rates.
• If a member is purchasing added years under the 1997 Regulations then for their added years to be ‘paid up’ they will need to satisfy the ill-health conditions under the 1997 Regulations. It is possible for a member to satisfy the old ill-health conditions but not the new 2008 conditions and vice versa, which could mean that their added years is ‘paid up’ but they are not entitled to an ill-health benefit or they are entitled to an ill-health benefit but their added years is not ‘paid up’ and will be apportioned.

Please read to Section 19 – Guidance for Ill-health Retirement for more or visit the LGPS Regs website for useful ill-health links.

Under the Regulations, once a member reaches age 55, they may remain in employment and draw their retirement benefits. You as the employer must ensure you have a written policy in relation to flexible retirement; this comes under Section 7 - Employer discretion policies.

For members to apply for flexible retirement, there are certain conditions that must be met:

• The employer must agree to the request for flexible retirement;
• The member must reduce either their hours, and/or their grade.
  Note - the specific reduction required is not set out in the Regulations, but instead must be determined by the employer. This detail must be specified within your flexible retirement policy.

If the member takes flexible retirement at their Normal Pension Age (NPA), then their benefits are paid without reduction. However, as most members take flexible retirement before their NPA, the benefits to be paid may be actuarially reduced. The employer has the option of waiving this reduction, but this would result in a strain cost, to be paid by the employer; this detail must be included in your flexible retirement policy.

If benefits are paid before NPA, the benefits are to be reduced in accordance with guidance issued by the Government actuary. However, the Regulations allow employers to choose to waive any reduction in whole, or in part, in the case of flexible retirement. This is different from ordinary early retirements where the employer can waive any reduction on compassionate grounds but only has the power to waive all of the reduction (so the employer cannot waive only part of the reduction).

If, in the case of a flexible retirement, you choose to waive a reduction in whole or in part, the cost of doing so has to be paid to the Fund and will be calculated by Southwark Pension Services in accordance with guidance from the Fund’s actuary.

If the flexible retirement occurs on or after age 60, there will be no strain cost to be met by the employer because the member will either have met the rule of 85, attained their NPA or, if they haven't, the actuarial reduction will be applied based on the period between the date of flexible retirement and the date the member attains the rule of 85, or the date they attain NPA if earlier.

If the flexible retirement occurs before age 60 and the member does not meet rule of 85 until age 60 or later, again there will be no strain cost to be met by you the employer, unless you waive the actuarial reduction.

It is advisable for you to obtain an estimate of benefits from Southwark Pension Services to determine any strain cost that would be payable by you as the employer before flexible retirement is agreed.

The member will have to draw:

• All of their pre 1 April 2008 benefits;
• All, some, or none of their 1 April 2008 to 31 March 2014 benefits;
• All, some, or none of their post 31 March 2014 benefits; or
• Any additional benefits in accordance with actuarial guidance issued by the Secretary of State.

Additional benefits are:

• Added years purchased by the member;
• Additional Voluntary Contributions - AVCs (if the member chooses to draw them);
• Additional pension bought by additional pension contributions (APCs)/Shared Cost additional pension contributions (SCAPCs);
• Additional pension bought by additional regular contributions (ARCs); or
• Additional pension awarded by the employer.

You must ensure you have a policy in place to cover flexible retirement. Southwark Pension Services is unable to process flexible retirements where no policy exists.

The earliest age at which benefits can be paid, other than ill-health, is age 55. Therefore, once a member reaches age 55, they can simply resign and start drawing their pension benefits. However, if they have not reached their Normal Pension Age (NPA) under the Scheme, then the benefits would be actuarially reduced.

There is not normally any strain cost to be paid by you (the employer) with this type of retirement, as the member receives reduced benefits. However, should you decide to waive the actuarial reduction, there would be a strain cost payable by you to the Fund.

In addition, if the member is aged between 55 and 60, it is possible that they have the rule of 85 protections. Unfortunately, as the rule was removed from the Scheme at the point where the earliest voluntary retirement age was 60, the protections do not automatically apply between age 55 and 60. Again there would be an actuarial reduction to the benefits. You, as the employer, do however have the option of ‘switching on’ the protections, but this would incur a strain cost.

You must have a written policy in place on whether you will consider waiving reductions and ‘switching on’ the rule of 85. Please refer to Section 7 - Employer discretions policies for more.

Once a member reaches their State Pension age, they can simply resign and start drawing their pension benefits, without any reduction. This is simply normal age retirement, as the member is retiring at their NPA under the Regulations.

Late retirement is basically the opposite of early voluntary retirement. Where there is an actuarial reduction for early release of benefits, there is an actuarial increase for taking them late. The current increase is 0.01% per day after the normal pension date and 0.001% on any automatic lump sum due from any pre 1 April 2008 accrual. Read Section 7 - Employer discretions policies for more.

Subject to your discretions policy, you can choose to award up to a maximum of £7,194* per annum additional pension applicable for the year 2020/21 (*increased in line with the Consumer Price Index each year). The additional pension would be payable in full at the member’s NPA, or if retired on grounds of Tier 1 or 2 ill-health.

If you are considering terminating a member’s employment for any reason, then you are advised to first request an estimate from Southwark Pension Services, using the Employer Request for Estimate form. The resulting calculation will determine whether there is a strain costs that you will have to pay to the Fund.

In the case of member driven retirements, such as early, normal, or late retirement, the member can contact Southwark Pension Services themselves and request an estimate of their benefits so they can then make an informed decision in regard to their retirement.

Employer driven retirement estimates can only be requested by you, the employer will only be returned to you. It is then up to you whether or not you pass on the benefit figures to the member. Please bear in mind that, in the cases of flexible retirement and voluntary redundancy, the member is likely to want to see the estimated benefits so that they can make a final decision as to whether they wish to proceed with the retirement.

Due to the potential large differences in benefits, if the estimate is in relation to ill-health, you must confirm the tier of ill-health benefits the estimate is to be based on so the correct enhancement (if any) is applied to the calculation. Failure to provide an estimated tier of benefits that may be awarded will mean that Southwark Pension Services will not be able to provide an ill-health estimate based on the appropriate tier.

Note - it is also important to remember that the Scheme rules and/or Government legislation is subject to change, therefore you should request estimates as soon as possible with an estimated last of service. However, if you request too far in advance it could be that the Regulations, or other legislation changes, and the estimate figures could be wrong. And not be in line with the new legislation – therefore new calculations will need to be done.

Read the Pension Administration Strategy (PAS) for more.

The funding of the Scheme is based on all members retiring at their NRA and receiving their benefits for a certain number of years, as well as a few other factors. If benefits are paid before they were expected to be paid, (before the Normal Pension Age of the member, for example) the pension fund suffers a detriment resulting in a ‘strain’ on the pension fund.

Employers are responsible for covering the cost of that ‘strain’ for any early release of benefits where the actuary has determined that the pension fund is suffering a detriment (such as redundancy, efficiency and in some circumstances flexible retirement).

The actual strain cost will depend on the individual member, as the amount is based on a number of factors, including age, gender, and years to Normal Pension Age .

Strain costs will always be payable where either the Scheme rules say the actuarial reduction cannot apply (redundancy, for example), or where the employer has chosen to waive the actuarial reduction (flexible retirement).

Strain costs will sometimes be payable where the member has not reached their NRA but have some protections under the Regulations (the rule of 85, for example).

Note - it is important to understand that the basis for calculation of strain costs is determined by the Scheme actuary, with reference to guidance from the Government Actuaries Department (GAD), and neither the Southwark Pension Fund, nor Southwark Pension Services, have control over this calculation.

Retirement terms

The following is a summary of the various types of retirement available, and the implications of each type from a pension point of view.

Optional/early voluntary retirement

• Where the active member chooses to retire (leaving employment) at or after age 55, but before Normal Pension Age ;
• No employer consent required and no strain cost to the employer; and
• Member benefits may be reduced for early payment depending on their age and length of service – the employer can waive any actuarial reduction and pay the strain cost of doing so if they wish.

You must have a written policy on whether reductions will be waived.

Ill-health

No minimum age;

• Must meet criteria set in the Regulations following an assessment by an independent medical practitioner, employer decision to release benefits and on what tier;
• Member receives unreduced benefits and may get enhancement dependent upon the tier awarded by the employer;
• No direct strain cost to the employer as already covered within employers’ contributions; and
• Tier 3 is a reviewable benefit, payable for a maximum of three years, and the employer must arrange a review after 18 months.
• Read Section 19 - Guidance for ill-health retirement for more.

Redundancy

• Where a job has ceased, and a redundancy payment is due;
• If the member is 55 or over, immediate payment of unreduced benefits are payable; and
• Employer must pay the strain cost of paying pension benefits early.

Interests of efficiency

• Where a member aged 55 or over leaves employment on efficiency grounds; and
• Unreduced benefits are payable immediately and the employer must pay the strain cost of paying the pension early.
• Flexible retirement
• The member aged 55 or over requests to have their pension benefits paid but continues working for the same employer;
• Member must reduce hours or grade (or both) from the date pension benefits are paid;
• Member benefits will be reduced for early payment unless the employer waives the actuarial reduction and pays the strain cost for early release of benefits;
• All flexible retirement cases must be fully approved by the employer, even if the member is over 60/65; and
• The member will remain in the Scheme and accrue further pension benefits unless they opt-out.

You must have a written policy on whether flexible retirement will be allowed AND whether actuarial reductions will be waived. You may wish to include details of the minimum levels of hours or grade reduction that would be acceptable.