Hidden costs for early retirement

Information about the cost for early pension payments

Why might a 'hidden cost' be incurred?

If an employer makes early, unreduced payment of pension benefits, this will often result in a cost, because of a shortfall in the pension funding. You may also know this as the hidden cost or pension strain. This may happen in the following circumstances:

  1. If a member satisfies the 'vesting period', is aged at least 55, and the employer terminates employment due to:
    • redundancy
    • business efficiency or
    • mutual agreement on business efficient grounds
  2. If an employer uses their discretion to waive percentage reductions following a member's request for early release of pension or by ‘switching on’ the 85-year rule protection.
  3. A flexible retirement may also incur hidden costs – depending on the individual’s age and membership details. There are more details about flexible retirement.

If you have questions about the effects of those protections and your costs, please contact Pension Services. 

How is payment of 'hidden cost' made?

The employer must pay Oxfordshire Pension Fund the value of the hidden cost.

After the employer has authorised the early payment of a pension or waived a percentage reduction, and a hidden cost or pension strain is identified, Pension Services will set up the recovery for the cost. See the section below ‘Hidden Costs and Repayment Periods’. 

We recommend an employer requests an estimate of the cost of this early retirement. 

Requesting an estimate

To find out what your potential 'hidden cost' might be, please request an estimate.

Please get in touch in advance to timetable the work for any bulk estimate or group projects.

Find the forms for HR estimates on the forms page. HR estimates can only be requested by employers, not members.

Notes about HR estimates

​If the member is paying any additional pension contributions, additional regular contributions, added years, Additional Voluntary Contributions, or has a transfer pending, there could be an increase to the hidden cost.

An estimate of hidden costs will not include the member’s personal benefit details. We will only include details of the member's benefits to employers if the member has completed the authorisation at the end of the form. If the member has given their authorisation, the employer will receive a copy of the estimated benefit statement with the details of the hidden cost.

To complete this form employers must supply Final pay and CARE Pay.

Final pay

Why do we need Final Pay?

The LGPS is now a career average revalued earnings (CARE) scheme. However many members keep their links to the Final Salary scheme.

These members do not build up Final Salary ‘service’ or ‘membership’ after 31 March 2014, but that part of their pension remains linked to their pensionable pay under the definitions of the Final Salary regulations. 

How to calculate Final Pay

  • Final Pay for an HR Estimate is the average for the last 365 days up to the effective date of the HR estimate - as if the member had worked full time, throughout the year - no gaps for reduced pay or absence, or part-time working.
  • List effective dates of any change in ‘whole-time equivalent pay’ over the year.  (This means for a part-time employee the rate of pay for someone doing the members job on full-time hours)
  • Include any ‘pensionable pay’ values which are relevant to that period. This means if a person had a pensionable honorarium in the last year covering a period outside of the last 365 days, then you must only show the portion relevant to those last 365 days.
  • Bite size training is available here https://lgpsregs.org/employer-resources/employer-bite-size-training.php  

Final Pay - dos and do nots

Do:

  • use full-time equivalent salary figures in your calculations
  • calculate an average over the 365 days prior to the effective date
  • include only additional elements of pay, pensionable under the 1997 Regulations
  • include overtime payments if they are contractual payments
  • scale-up your Final Pay figure for anyone working over full-time hours

Do not:

  • use actual salary figures in your calculations
  • use term-time salary figures in your calculations
  • provide a salary figure as at 31 March
  • include additional elements of pay that were not pensionable under the 1997 Regulations
  • include overtime payments if they are not contractual payments
  • provide scale point figures for anyone working over full-time hours

Final Pay tools

Final pay examples (pdf format, 167Kb)

CARE pay

CARE pay is the member’s actual pensionable pay under the LGPS 2014 rules and used to assess the member’s pension in the career average revalued earnings scheme.  For an HR estimate , the better the pay information, the more realistic the estimate can be.  

If the member has been away from work, or on reduced pay due to ill health or paid child-related leave the figure you need to show under CARE Pay may need to include  ‘assumed pensionable pay’.

Assumed pensionable pay

This is the average of a member’s actual pay for the three months period before the break adding in any expected annual lump sum payment if this is part of your policy.  Assumed pensionable pay is used in times to ensure a member does not suffer a reduction to their pension when their pay is reduced.

If you do not include assumed pensionable pay when this notional figure is due, the estimate is likely to be lower.  Pension Services prepare estimates based on the average of the previous three months CARE returns from the MARS returns, taken to an annual average. In the event the actual final figures for the member are higher, the actual hidden cost will be charged, not the estimated figure. You are strongly advised to complete the CARE pay, and not rely on default values which may not correctly reflect the pension or the hidden costs.

Please refer to the HR and Payroll guides on www.lgpsregs.org for more details on these terms or contact Pension Services. Bite size training is available here https://lgpsregs.org/employer-resources/employer-bite-size-training.php   

How is hidden cost paid? 

The value of the ‘hidden cost’ is paid by the employer representing the loss of investment return and contributions as well as the cost of paying the pension for more years than the calculation of the employer contribution. 

The invoice for the 'hidden cost' is issued by the Pension Investment Team once the member is in receipt of their pension and is payable in full at that time.