All employers within the Hertfordshire Pension Fund, should be aware of the potential additional costs they could incur should one of their members be granted ill health early retirement.
What are the impacts on the employer if an employee retires early due to ill health?
When one of your current employees can no longer work and retires due to ill health, there is an increase in the pension liability for you as the employer. This results from:
- Early payment of the pension; and
- An increase in the benefits payable to the member based on either full prospective service to normal retirement age for a Tier 1 early retirement, or 25% of prospective service for a Tier 2 early retirement.
This has been illustrated in the table below. The figures shown represent actual strain costs for ill health early retirements from the Fund, as calculated by the Administering Authority’s (LPPA) administration system. These resulted in an immediate increase to the liabilities (and hence an increased cost) for the member’s employer.
Strain costs
| Age | Salary | Accrued service | Tier 1 strain cost |
|---|
| 45 |
£11,000 |
5 years |
£185,000 |
| 44 |
£25,000 |
2 years |
£322,000 |
| 31 |
£32,000 |
11 years |
£503,000 |
| 51 |
£88,000 |
23 years |
£714,000 |
Note that current employees may also be awarded Tier 3 ill health early retirement. The additional costs for these are typically significantly lower as Tier 3 pensions are only payable for a maximum of three years, and they do not include any enhanced prospective service.
In the event of a Tier 1 or 2 ill health early retirement, in most circumstances the Fund will invoice employers for the associated strain cost for immediate payment. One option open to employers to mitigate against this potential additional cost is to obtain insurance cover. It is for each employer to determine how they wish to cover ill health strain costs and insurance is just one option. Please contact pensions.team@hertfordshire.gov.uk if you would like more information about ill health risks.
Impact on contribution rates
If an employer can provide evidence of them having suitable insurance cover in place, then they may receive an equivalent reduction in the employer contribution rate payable to the Fund which is broadly comparable with the portion of the employer contribution rate that would have been reserved for ill health strain costs. This deduction is permitted as eligible* employers’ LGPS contribution rates already include a small element to cover ill health benefits and strains.
Eligible employers include all Fund employers excluding employers in the Academies Pool and the Parish and Town Councils Pool. The contribution rates payable for these excluded employers have already had the ill health element removed. Please contact us for clarification if you are uncertain if you are an eligible employer.
Further information on the Fund’s approach to ill health risk management can be found in our Funding Strategy Statement
The LGPS Regulations (Part 1, 35-39) are also a useful source of information regarding ill health retirements. These can be found at: Timeline LGPS Regulations 2013 (lgpsregs.org).