Hidden costs for early retirement | Oxfordshire County Council

Hidden costs for early retirement

Information about the cost for early pension payment and other employer discretions

An unreduced pension is payable immediately after leaving employment if the member satisfies the ‘vesting period’ and Is aged at least 55, and the employer terminates an employment due to:

  • Redundancy
  • Business efficiency or
  • Mutual agreement on business efficient grounds.

An early unreduced payment of pension benefits could result in a shortfall in the pension funding. This shortfall is also known as the hidden cost or pension strain. The employer pays the OCCPF the value of the hidden cost. An employer can request an estimate of the cost of this early retirement to help with the budget planning

Employer costs may also be incurred by using the discretion to waive percentage reductions following a member’s request for early release of pension or by ‘switching on’ the 85 year rule protection. If you have questions about the effects of those protections and your costs, please contact Pension Services.

A flexible retirement may also incur hidden costs – depending on the individual’s age and membership details. There are more details about flexible retirement

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 section below ‘Hidden Costs and Repayment Periods’

Requesting an estimate

To have a better idea of your potential ‘hidden cost’, request an estimate. Use the HR estimate request form (doc format, 157 KB)  or the Flexible Retirement Estimate form (doc format, 357Kb) and send to Pension Services

We will reply within 10 working days

If you are considering a bulk costing exercise, or need estimates for a group of employees please contact Pension Services to discuss the work timetable and information we need.

These retirements must be authorised by the employer  so we will not accept an estimate request from the member.  Please do not use this estimate request form on behalf of your employees for estimates to normal pension age or for general pension values.

To complete the HR estimate request form, the employer will need to supply:

  • Name of employing authority
  • Name of employee
  • Employee’s Payroll reference or job title
  • Employee’s Date of birth
  • Reason for leaving
  • The assumed date of payment (in most cases this will be the expected last day of service)
  • Final pay**
  • CARE Pay ***
  • Scheme section choice  (The estimate will assume any future time will be in this section ie main section or 50/50 section.
  • Amount of additional pension the employer wishes to give (this is a discretionary benefit)
  • Waive early retirement reduction+
  • Switch on 85 year rule+
    (+ these last two will not be appropriate for the redundancy type reasons for leaving shown above)
  • Name of approved HR advisor requesting the estimate and the date.


Pension Services will, in return, provide details of:

  • The membership to 31 March 2014 used to calculate the pension
  • The employer’s hidden cost and
  • The repayment period of the hidden cost.
  • The earliest retirement date


Pension Services will also tell you if the member is paying any additional pension contributions, additional regular contributions, added years, Prudential Additional Voluntary Contributions, or has a transfer pending. These may increase the hidden cost.

We do not send details of the member's benefits to employers unless 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

Final pay is used for membership that has built up until 31 March 2014, but remember, the ‘final pay period’ is not frozen at 31 March 2014, it will keep pace with the member and he/she continues in LGPS.

Looking at the last 365 days (that is starting from the last day of service you give on the estimate) list the details of the rates and effective dates of any change in ‘whole time equivalent pay’ over the year ending with that last day of service. 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 honoraria 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. ‘Final Pay’ here is as defined in the 2007 regulations and could be the best one (keeping the anniversary of the estimated last day of service) of the last three years, in these cases you may need to provide additional details. Sometimes the  ‘final pay period’ will be extended when Regulation 10 applies, the member will be making that choice following a reduction in pay in the previous 10 years. Ask Pension Services for more details if this situation might apply.

*** CARE pay

This information is the member’s actual pensionable pay under the LGPS 2014 rules and used to assess member’s pension in the career average revalued earnings scheme.  For an estimate of employer’s pension costs, the better the pay information, the more realistic the estimate can be.  We do collect CARE pay information from employers monthly: you could supply the pensionable pay you expect to pay from last MARS submission to the expected last day of service.   You could supply the monthly rate of the pensionable pay or the annual rate.  Although do tell us what period the figures are representing.

Remember the 2014 scheme definitions of pensionable pay – include  supplements and non-contractual overtime.

If the member has been away from work on statutory or authorised leave then the figure you need to show under CARE Pay must be ‘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 complete this section of the form, Pension Services will prepare estimates based on the average of the previous 3 months CARE returns, which every employer makes monthly to Pension Services, 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 defaulted 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.

Hidden costs and repayment periods

Information about the hidden costs to bring a pension into early payment

The hidden cost (sometimes known as the capital cost or the pension strain) is the upfront cost the employer has to pay after agreeing to bring a member’s pension into payment early. A hidden cost charge may also be levied following an employer’s agreement to waive a reduction the member would have had to suffer in requesting an early payment of their pension

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 value is not an accurate to the penny assessment but payable by the employer following the early retirement decision. If the member were to die one year after retirement, you will still be asked to pay the full amount for ‘hidden costs’.

The hidden cost will generally be spread over a repayment period.

The formula to calculate the maximum repayment period is:

  • The lesser of five years or
  • The period starting from the day after retirement to the later of:
    • age 60 or
    • The earliest retirement date.

For costs of retirements after April 2014 the changes to the normal retirement age in the new scheme will affect the ‘hidden costs’

After an early retirement the Pensions Investment team will contact you to confirm the hidden cost and the repayment period. If you wish to reduce the repayment please speak to the investment team.

Last reviewed
16 May 2017
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