Local Government Pension Scheme (LGPS) employers are required by law to formulate and publish a statement of how they'll apply certain discretions allowed under the LGPS regulations.
If you have yet to set your policy, you may wish to use the discretions template attached to this page. This enables you to adopt example discretions, similar to that applied by Derbyshire County Council, or set your own.
There are 4 main areas defined by the policy which affect potential costs to you as the employer:
You can find detailed information in the Local Government Association's guide to discretions.
We cannot set your discretions policy for you. Setting your policy is one of your main LGPS responsibilities. It is also essential that you provide a copy of your policy to the Fund.
Your discretions policy must be available to your employees and former employees who are, or were, in the LGPS. Most employers publish it on their website. We may also publish your discretions policy on our website.
If you don’t have a policy in place, it may affect how your employees or former employees are able to draw their pension benefits and may result in a suspension of the right to grant early payments for redundancy, ill health, compassionate or other grounds. We don't need to approve your policy, but you must have published it before it can be put into operation.
Your policy should be kept under review and any changes to your policy should be notified to us within one month. If you'd like us to send you a copy of your submitted policy so you can review it, or if you’re not sure whether you have submitted yours to us, please contact us, email: pensions.regs@derbyshire.gov.uk.
Guidance on the LGPS Mandatory Discretions
When formulating your discretions policy you must:
- Avoid setting policies which may lead to a serious loss of confidence in the public service, (for example, allowing flexible retirement for a minimal reduction in working time, such as, 1 hour)
- Ensure the policies are workable, affordable and reasonable, especially with regard to foreseeable costs
- Ensure the policies are non-discriminatory
- Avoid blanket or fettered (overly restrictive) policies
- Keep the policies under regular review
The Mandatory Employer Discretions
The principal discretions fall into 4 main categories:
There are 2 further mandatory discretions, from older regulations which remain in force, that you are required to include in your policy, although the chance of you needing to apply your discretion may be minimal.
Additional Pension
The LGPS includes an option to increase pension benefits by using Additional Pension Contributions (APCs).
An APC can either be to buy extra pension or to cover lost pension from an unpaid absence. However, the employer’s mandatory discretions relating to APCs are for the purchase of extra pension only.
There is a maximum APC amount that a scheme member can have as extra pension. This figure is reviewed each year in line with the cost of living. You can find out more on the national LGPS member website: Additional Pension Contributions
Extra Pension:
LGPS members (or their employer) can use APCs to boost their pension benefits at retirement. The member must be in the main section, rather than the 50/50 section, to increase their benefits in this way.
Members can choose to buy extra pension by spreading payment over a number of complete years (unless they are within one year of their normal pension age,) or by making a one-off payment. Employers can choose to contribute in full or part towards the cost of the extra pension. The member must obtain written confirmation of the share that their employer has agreed to pay before making an application to buy APCs.
There are 2 mandatory discretions relating to APCs:
1) Whether, how much, and in what circumstances the employer will contribute to a shared cost APC scheme.
If you set your policy to allow consideration for sharing the cost in some cases, you will need to describe in what circumstances you would share the cost.
Please note:
- This discretion does not relate to cases where a member is buying an APC to cover lost pension. There is a seperate discretion about whether to extend the 30 day period when electing to buy lost pension, which isn't mandatory to publish.
- There is a similar discretion relating to Additional Voluntary Contributions (AVCs), but it is not mandatory to publish a policy on sharing AVC costs.
2) Whether, at full cost to the employer, to grant extra pension, within the maximum allowances, to an active member, or within 6 months of leaving to a member whose employment was terminated on the grounds of redundancy/business efficiency.
You must describe in your policy the circumstances when you will purchase extra pension for a member. Any award of additional pension under this discretion is at full cost to the employer.
If you wish to set your policy to allow an award of extra pension, there are a number of considerations:
- Possible legal challenges on age or gender discrimination grounds.
- If awarding extra pension at retirement, it may be subject to actuarial reduction for early payment, so the employee may not see the full value.
- There could be tax implications for the employee as the extra pension could cause them to breach the Annual Allowance or Lump Sum Allowance.
You can estimate the cost of contributing to, or purchasing in full, an APC on the LGPS member website.
Waiving actuarial reductions
If an employee or ex-employee, who is an LGPS member, elects at age 55 or later to draw their LGPS pension before their normal pension age, an actuarial reduction is applied.
If however an employee is dismissed between 55 and State Pension age on the grounds of redundancy or business efficiency, the actuarial reduction is waived, at an unavoidable cost to the employer.
There are 2 mandatory discretions relating to waiving actuarial reductions, which allow you to waive reductions to a member’s LGPS pension, either:
- on any grounds (limited for most members to membership after 1st April 2014 only)
- on compassionate grounds (applies to all membership periods)
1) Whether to waive, in whole or in part, actuarial reduction on LGPS benefits which a member voluntarily draws before their normal pension age.
The reduction can be waived in full or in part, and would require a one-off payment to us representing the full, capitalised cost of waiving the reduction.
2) Whether to waive, in full, any actuarial reduction on pre and/or post April 2014 benefits paid early on compassionate grounds.
This could be an existing employee or ex-employee. All ex-employees are able to voluntarily draw their pension benefits without their former employer’s approval at any time from reaching age 55. However, the employer has the power to waive the actuarial reductions which would ordinarily be applied if they decide that there is sufficient reason for compassionate grounds to be applied.
The LGPS regulations do not define the meaning of compassionate grounds and is, therefore, at the discretion of the employer to determine.
There may be some periods which can only be waived on compassionate grounds depending on how long the member has been in the LGPS, and therefore can only be waived in full.
Determining the periods for when and on what grounds an employer can decide to waive an actuarial reduction is complex. The LGA's Discretions guide details the groups of members and which periods of their membership can have reductions waived, in full or part.
If member retires on flexible retirement, the employer may waive all, some or none of any reduction on any grounds.
Where members have multiple pension records, each record is considered separately and therefore may fall into a different group.
Upon request the fund will provide an estimate of potential costs, however due to the complexity of the calculation, you should always contact us giving at least two months’ notice of the required information, in accordance with our Administration Strategy.
Where an employer decides to waive an actuarial reduction, (in full or part), it would require a one-off payment to us representing the full, capitalised cost of waiving the reduction. The member’s pension benefits cannot be adjusted to recognise the waived reduction until payment from the employer has been made.
Switching on Rule of 85 before 60
The Rule of 85 is a protection for employees (and ex-employees) who were in the LGPS before 1 October 2006, and is the point when their age plus the time of their LGPS membership (in whole years) totals 85.
For most members the Rule of 85 only protects their pension benefits in respect of their membership before 1st April 2008, and is automatically applied at age 60 if the member met the Rule of 85 before then.
Where a member has met the Rule of 85 and is taking their pension benefits between age 55 and 60, the employer has the power to “switch on” the Rule of 85 at a cost.
It can be switched on by the employer for:
- Current employees retiring.
- Ex-employees with deferred benefits, retiring.
- Ex-employees who had been awarded an ill health retirement pension that was subsequently suspended.
The mandatory discretion is:
Whether to “switch on” the 85 year rule for a member voluntarily drawing benefits on or after age 55 and before age 60.
The one-off payment representing the cost of switching on the Rule of 85 before age 60 must be made to us before the decision can be reflected in the member’s pension benefits.
It is worth noting that this option does not apply to current employees going through flexible retirement. For flexible retirements the Rule of 85 is automatically switched on before age 60 and cannot be switched off.
Flexible Retirement
If an employee reduces their hours or moves to a less senior position, and the employer gives their permission, they may be able to start receiving their pension from the age of 55, even though they're still working. The benefits of flexible retirement can be:
- Eases the employee into retirement.
- The employer retains knowledge and skills of experienced staff.
- Assists the employer in succession planning.
Employees can continue to build up further pension benefits in their ongoing job on either lower hours or in a less senior role.
It's important to note that:
- Taking flexible retirement before State Pension age means that the employees’ pension benefits will normally be reduced.
- The Rule of 85 is always switched on for flexible retirements and cannot be switched off, therefore granting flexible retirement for someone under age 60 may result in an unavoidable shortfall cost. You should request an estimate of the cost from us prior to approval.
- Where an employer wishes to compare the cost of waiving some, or all, of the actuarial reduction, it is always advisable to ask us for or an estimate of the cost.
The mandatory discretion is:
Whether all or some benefits can be paid if an employee over 55 reduces their hours or grade (flexible retirement).
There are a number of considerations to be aware of:
- Without a clear policy, staff may have unrealistic expectations of being approved for flexible retirement.
- Some cases under 60 may have an unavoidable employer shortfall cost (Rule of 85).
- The possibility of waiving reductions.
- How much of a reduction in hours is acceptable.
- Whether to allow an increase in hours or grade after taking flexible retirement.
Considering whether to grant an application from a deferred member (ex employee) for early payment of their pension benefits on or after age 50 and before age 55
HMRC rules relating to the earliest that someone can voluntarily retire and receive their pension changed in April 2010 from being age 50 to age 55, however some regulations in place before the change are still in force.
Due to this, in theory an employer can grant someone aged over 50 and under 55 access to their pension, but it would be classed as an “unauthorised payment” for HMRC purposes and as such the individual would be subject to penal unauthorised payment charges of up to 55%, but, there is no cost to the employer for exercising this discretion.
This discretion and the unauthorised payment charges do not apply to ill health retirement cases.
While it is up to individual employers to set their own policy for this discretion, our example employer discretion is worded that each application will be assessed on a case by case basis.
Deciding if an employee who opted out of the LGPS before 1 April 2008 can be paid their pension benefits accrued before opting out at their Normal Retirement Date
This discretion only covers members who opted out of the LGPS between 1 April 1998 and 31 March 2008 and gives the employer discretion to allow (or not) the employee to draw their pension from their normal retirement date of 65.
While it is up to each individual employer to set their own policy for this discretion, if the policy is set to allow pension benefits to be paid from 65, then this would be consistent with how employees who opted out before 1 April 1998 or after 31 March 2008 are treated within (non-discretionary) LGPS regulations. Therefore our example employer discretion is worded to allow this group of people to get their benefits from their age 65.
There is no cost to the employer for exercising this discretion.
Links to useful documents