What are strain costs and when will they occur?
Pension strain costs (often also called capital costs) occur when there is a clear shortfall in the assumed level of funding needed to provide a particular pension benefit.
Often, strain costs occur when a member draws their benefits earlier than expected.
The normal pension age for all members of the Local Government Pension Scheme (LGPS) is currently aligned to the members State Pension Age. Members aged 55 and over can elect to retire early without their employer's consent. Actuarial reductions may be made where applicable, which remove the need for any strain cost.
A member may request to retire early and ask you as an employer to:
- waive actuarial reductions or,
- allow other protections to apply in their circumstances.
Please see below to find out more information regarding strain costs in different circumstances and when these are payable.
Redundancy and efficiency
If a member is allowed to retire early, and particularly if the grounds for retirement are redundancy or efficiency then there is likely to be a strain cost.
This is because it is assumed that as the benefits are being paid earlier then they will be paid out for longer. Also because:
- employee and employer contributions will not have been paid for as long as was anticipated and,
- no actuarial reductions have been applied to their benefits.
In the same way, pension strain costs generally always occur for ill health retirements. Benefits are generally paid earlier than expected and without a reduction for early payment. Plus those benefits may also be enhanced.
Death in service
Deaths in service can also lead to strains on the Fund. Particularly when people die young in service and leave dependants who are entitled to pension benefits.
If an employer chooses to award additional pension to a members pension, then there will be a strain cost for doing so.
How will I pay for strain costs?
Most strain costs are payable up front as a lump sum to the Fund at the point that an event occurs. Strain costs relating to "no fault" events such as ill health retirements and deaths are not payable up front but instead are absorbed within the ongoing employer's contribution rate as part of the triennial actuarial valuation.