LGPS strain payments

Random47

Does anyone have some knowledge on how LGPS strain payment is calculated when retiring early. I understand its not just the difference between actuarial reduce pension and full pension multiplied by years before NPA (or age pension pays out full) but rather an formula that considers the actual full life costs of full pension paid early until expected death age.

i.e. If you had full pension of £30K but it was reduced to £25K as retiring early by 5 years it is not just 5K x 5years (strain of £25K to employer but strain is actually higher value) 

Silvertabby

In my experience, employers only pay costs (strain payments) when they absolutely have to - ie, redundancy.

If you are considering normal retirement, have you asked your employer if they will meet the early payment cost? 

The calculation is extremely complex but, based on the figures you have given, I would expect the strain cost to be more like £100K (20 x £5K).  It's based on life expectancy rather than number of years taken early.

Random47

Hi Silvertabby thanks.

Essentially its the basic formula or close to it that I am looking to understand.

My circumstances are possible escape on early retirement in 7 years when 62, though might go to 63 with the cost of living (lol). Difference between actuarial and full pension accrued at that age/time of 62 will be £6.5K and down to just under 6K at 63. 

Silvertabby

There is no basic formula I'm afraid - it's well complicated, with different factors for GMP, any R85 protections, age, etc etc.

If you have been reading the LGPS regs, you will have probably seen that employers can opt to pay the strain costs re the early retirement reductions.  I'm not going to sit here and type that no employer will do that, just that in my 20 years as a LGPS administrator I never saw a case of this happening. 

Even if your employer does the amazing, and agrees to pick up the strain, then your pension would be what you had accrued to your date of leaving, but without the early payment reductions.  The only way you could retire at 63 and have your pension enhanced to what you would have accrued at SPA would be if you went on Tier 1 ill health grounds.

20 times the difference between your actual pension at 63, and the pension taken at 63 with the early retirement factors applied is a really rough and ready estimate, but will give you some idea of how expensive it is. 

hyubh

Random47 said:

Does anyone have some knowledge on how LGPS strain payment is calculated when retiring early. I understand its not just the difference between actuarial reduce pension and full pension multiplied by years before NPA (or age pension pays out full) but rather an formula that considers the actual full life costs of full pension paid early until expected death age.

i.e. If you had full pension of £30K but it was reduced to £25K as retiring early by 5 years it is not just 5K x 5years (strain of £25K to employer but strain is actually higher value) 

The primary reason why there is no generic answer is that, while actuarial reductions are defined at the scheme level, strain charges are defined at the fund level, by the fund actuary. So another LGPS member your age with exactly the same service and looking to retire early on exactly the same day would have the same actuarial reduction calculated but potentially a different strain charge, simply because they are in a different LGPS fund - or even, are in the same fund, but with a different employer (it's perfectly valid for the fund actuary to treat different sorts of employer differently, since different sorts of employer carry differing risks to the pension fund of defaulting on their liabilities).

Random47

Thanks for replies and confirmation no specific formulae given all the varying factors fund mgrs uses to calculate.

I think the x20 difference (for 62/63 age) seems probably best ready reckoner as it essential strain cost lump payment would fund pension pot until 82 (with assumption that's the expected lifespan of recipient). Will let me update my spreadsheet with likely strains (though not holding my breadth they would be paid).

I've seen some strains paid by my employer but these tended to be minimal amounts <5K when some staff have taken flexible retirement. The golden goodbyes are long gone. 

Silvertabby

Random47 said:

Thanks for replies and confirmation no specific formulae given all the varying factors fund mgrs uses to calculate.

I think the x20 difference (for 62/63 age) seems probably best ready reckoner as it essential strain cost lump payment would fund pension pot until 82 (with assumption that's the expected lifespan of recipient). Will let me update my spreadsheet with likely strains (though not holding my breadth they would be paid).

I've seen some strains paid by my employer but these tended to be minimal amounts <5K when some staff have taken flexible retirement. The golden goodbyes are long gone. 

In the case of strain costs and flexible retirement it is possible that the employer HAD to pay.  If flexible retirement is authorised before 60, and the member meets R85, then the employer has to pay strain costs for the period between date of leaving and 60.  The member then takes the full 'hit' for early retirement reductions from 60 onwards.  By now, this will only apply to pre 2008 accruals, and would explain why the amounts quoted seem so low.

ZeroSum

Random47 said:

Hi Silvertabby thanks.

Essentially its the basic formula or close to it that I am looking to understand.

My circumstances are possible escape on early retirement in 7 years when 62, though might go to 63 with the cost of living (lol). Difference between actuarial and full pension accrued at that age/time of 62 will be £6.5K and down to just under 6K at 63. 

If you go early on a reduced pension  then their isn't a strain on fund as the reduction is effectively that. 
Employers only pay the strain on fund if you go early on full pension which comes about from redundancy or efficiency related retirement (ie voluntary severance)

Silvertabby

ZeroSum said:

Random47 said:

Hi Silvertabby thanks.

Essentially its the basic formula or close to it that I am looking to understand.

My circumstances are possible escape on early retirement in 7 years when 62, though might go to 63 with the cost of living (lol). Difference between actuarial and full pension accrued at that age/time of 62 will be £6.5K and down to just under 6K at 63. 

If you go early on a reduced pension  then their isn't a strain on fund as the reduction is effectively that. 
Employers only pay the strain on fund if you go early on full pension which comes about from redundancy or efficiency related retirement (ie voluntary severance)

In my experience, yes - but the rules do allow employers to pay the strain costs in the case of normal/voluntary retirements if they wish.  That's what OP is hoping for.

ZeroSum

Silvertabby said:

ZeroSum said:

Random47 said:

Hi Silvertabby thanks.

Essentially its the basic formula or close to it that I am looking to understand.

My circumstances are possible escape on early retirement in 7 years when 62, though might go to 63 with the cost of living (lol). Difference between actuarial and full pension accrued at that age/time of 62 will be £6.5K and down to just under 6K at 63. 

If you go early on a reduced pension  then their isn't a strain on fund as the reduction is effectively that. 
Employers only pay the strain on fund if you go early on full pension which comes about from redundancy or efficiency related retirement (ie voluntary severance)

In my experience, yes - but the rules do allow employers to pay the strain costs in the case of normal/voluntary retirements if they wish.  That's what OP is hoping for.

Yes the rules do allow it, but given current restraints on local authority budgets, those days are long gone

sevenhills

My WYPF gives examples of what you can expect to get at 60/65/67 etc it doesn't mention anything about other costs.