Sometimes when a Local Government Pension Scheme (LGPS) member leaves your employment there's a cost to you as the scheme employer. This section will help you to know when to expect these shortfall costs and why. They are normally referred to as 'shortfall' or 'strain' costs.
Redundancy and business efficiency
When an employee who is a member of the LGPS is made redundant, or retired on the grounds of business efficiency at the age of 55 or older, there will be a cost to the employer. This is because immediate payment of their pension is mandatory and the pension is paid unreduced. The cost of this non-reduction is proportionate to the how far away the member is to their State Pension age (SPA).
We recommend that you always request an estimate of the potential shortfall cost from us. Please use the E1 form on our form for employers page.
Flexible retirement is an agreement between the employer and a scheme member to allow the member, subject to being aged 55 or over, to draw their LGPS pension benefits while their employment continues on lesser terms in respect of hours worked or level of responsibility.
All other retirements require the member to leave employment before claiming his or her pension, but flexible retirement may be a useful tool to help with management of a mature workforce and begin to plan for succession while retaining skills. Scheme employers are required to have a policy when it will approve flexible retirement, including whether it will waive any reductions (see our page on employer discretions).
If the member is taking flexible retirement before their normal pension age, their pension and lump sum will normally be paid at a reduced level.
In some instances there may be a shortfall cost to the employer, particularly if the member is under 60. This is because the member may meet the 'rule of 85' protection, which enables some of their benefits to be paid without a reduction. As with redundancy, employers are recommended to ask us an estimate of any prospective shortfall costs.
If the member is 55 or over they'll be eligible to take their pension immediately. An employer can opt to waive the actuarial reduction to the pension benefits and would be invoiced accordingly.
If you wish to receive an estimate for the potential shortfall cost of waiving the reduction, please use the E1 form on the forms for employers page.
Ill health retirement
When a scheme member is granted ill health retirement, payment of the member’s ill health pension is immediate. The shortfall cost for an ill health retirement is not only linked to the age of the member, but also to any enhancement applied to the pension. However, unlike other shortfall costs, you will not be invoiced by us, instead the cost is reflected in the triennial valuation of the fund and your subsequent employer contribution rate.
If you have any queries about retirement, please contact us.