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Employers could benefit from a rise in the minimum age their staff can take their pension
The law governing the minimum age at which individuals can take pension scheme benefits is to rise from 50 to 55 years old.
A change to the Local Government Pension Scheme on 1 April 2010 will trigger the rise. The change - which will not affect early retirements due to ill health - was introduced in the Finance Act 2004.
Changes to the LGPS
In March 2008, the LGPS underwent major changes. The way it has chosen to implement them is as follows:
- from 31 March 2008, all new members of the LGPS have a minimum retirement age of 55;
- members who joined the LGPS prior to 31 March 2008, and who wish to take their benefits from the scheme before 31 March 2010, can do so from age 50;
- after 31 March 2010 all members can only retire from age 55.
Depending on the circumstances of the early retirement, the consent of the member’s employer may or may not be required.
The provisions on early retirement due to ill-health in the LGPS are unaffected by this change.
Strain payments
Where a member of the LGPS, whose employer has been admitted to the scheme, takes early retirement, it usually results in the payment of an additional amount by that employer, called a strain payment.
Employers admitted to the LGPS will usually have agreed, via their admission agreement, to making additional payments to cover the ‘actuarial strain’ - the cost to the LGPS of allowing a member to take their benefits early.
The payment amount is usually determined by the employer’s administering authority, and depending on the circumstances of the member, these additional payments can vary a lot and be substantial.
Employer benefits
Strain payments will often be required when an employer is making redundancies. Prior to 31 March 2008, where an LGPS member was made redundant between the ages of 50 and 65, they had a right to take their benefits from the LGPS as a result of that redundancy. Consequently, the LGPS member’s employer would have been required to make a strain payment in respect of that person.
The increase in minimum retirement age from 1 April 2010 will mean that members aged between 50 and 54, inclusive, will no longer have an entitlement to take early retirement from the LGPS as a consequence of redundancy. Those aged 55 and over will still have that right.
Therefore, employers making redundancies are likely to face a reduced category of employees who can choose to retire early and so give rise to strain payments. This could greatly reduce the cost of redundancy for some employers.
Clearly, delaying such a programme until after 31 March 2010 will not be appropriate for everyone, but employers contemplating redundancies may find that there are substantial financial benefits in waiting until after that date before making those redundancies.
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