What is pension strain in redundancy and who pays?

Pension strain in redundancy is the extra cost to a pension fund of paying a pension early and in full; in the LGPS, the fund can charge it to the employer.

What does pension strain mean when someone is made redundant?

In the LGPS it is a cost the fund can pass to the employer, not a deduction from the member's pension. Facing redundancy from a council job? Add your contact details to the quick form on this page and you will be phoned, free of charge, by an FCA-authorised adviser. Greater Manchester Pension Fund's guide for employers defines it this way: "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, the guide says, the cause is a pension drawn a lot earlier than expected, because the fund has paid in less than it planned and must pay out for longer.

Take a council worker made redundant a few years before their normal pension age. Their pension would otherwise have waited, and the fund's sums assumed it would. Starting it now, with no reduction, leaves a gap between what the fund holds for that member and what it now has to provide. That gap is the strain.

In England and Wales the rule sits in regulation 30 of the 2013 scheme regulations: an active member aged 55 or over, dismissed by reason of redundancy or business efficiency, "is entitled to, and must take immediate payment of" their pension. The main benefits are paid "without reduction". The full conditions are in LGPS redundancy rules and, for other schemes, in final salary pensions and redundancy.

Who pays the strain cost?

In the LGPS it is the employer, if the fund asks. Regulation 68(2) says an administering authority "may require the Scheme employer concerned to make additional payments to the appropriate fund in respect of any extra charge on the fund" where benefits become payable at once under the redundancy provision. The same wording covers a reduction that the employer chooses to waive. The administering authority is the body that runs the local pension fund.

The member's side is different. The LGPS member website says your main benefits are not reduced for early payment, although any extra pension bought through additional pension contributions is, apart from pension bought through a Qualifying Additional Pension Arrangement. So the member gets the pension and the employer's fund account takes the cost. The wider picture of what employers pay in is in LGPS employer contributions.

How the bill is settled varies from employer to employer, according to the Greater Manchester guide. For an employer in a pool, it says some costs are pooled, some may be charged to a separate budget within the employer contribution rate, and others may be invoiced for payment up front.

How is the cost worked out?

Regulation 68(2) frames the payment as one "in respect of any extra charge on the fund", and where a reduction is waived it refers to the cost as calculated by an actuary the administering authority appoints. At Greater Manchester, its guide says, the fund's pensions system calculates the capital cost as part of the benefit calculation.

In outline, the Greater Manchester guide gives two reasons for a strain cost when someone leaves on redundancy or efficiency grounds: "it is assumed that as the benefits are being paid earlier then they will be paid out for longer", and employee and employer contributions "will not have been paid in for as long as was anticipated". The earlier the start, the larger the pension and the longer it runs, the larger the gap tends to be.

The same guide tells Greater Manchester employers how to get an estimate, from the fund's system or through an estimate request form. The figure for your own case comes from your employer's fund, and an adviser can explain free what to ask for once you leave your number on this page.

Why can strain affect redundancy decisions?

The Greater Manchester guide says that where someone 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". Separately, it recommends that employers think about how a fall in active members could affect their liabilities if they are planning redundancy or similar exercises.

For the person leaving, the practical questions are different:

• Is the exit being treated as redundancy or business efficiency? The regulation covers dismissal on those grounds and termination "by mutual consent on grounds of business efficiency".
• Have you at least two years of qualifying service? Paragraph (9) limits paragraphs (1) to (8) of regulation 30 to members with two years.
• Are you 55? The Finance Act 2022 raises the normal minimum pension age from 55 to 57 on 6 April 2028, and the LGPS member website gives the same change for the scheme.
• Do you want to start the pension? Because the member "must take" payment, redundancy on these terms is not a choice to defer. Pension timing, tax-free cash and tax on the income should be checked before the last day; see taking a pension at 55.

Ask for the grounds of the exit in writing, and for the pension figure on that basis, before you reply to any offer.

Strain in other schemes, and how to compare the figures

Strain is not unique to local government. In the NHS, a redundancy pension may be paid at once where your contract lets you take it instead of some or all of the cash, and the contract decides whether it is reduced, as the NHS leaving guide explains. In teaching, a cost can fall partly on the employer when it grants premature retirement: see taking a Teachers' Pension early. Where the employer is a private business with a final salary scheme, the trustees and the scheme rules decide; what a final salary pension is sets out the basics.

To see what the redundancy route is worth, ask for three quotations side by side: the pension if you wait for your normal pension age, a reduced pension if you leave and claim at 55 without the redundancy route (see LGPS early retirement reductions), and the unreduced redundancy pension. The gap between the last two is what the redundancy route is worth to you, while the strain is what the fund can charge the employer for paying it early and in full.

Strain, augmentation, Scotland and waivers: common questions

How does strain differ from the cut made for early retirement?

A reduction cuts the member's pension; strain is the employer's payment into the fund when no reduction applies. Both exist because early payment costs more. See early retirement reductions.

What is pension augmentation in redundancy?

Regulation 31 lets a Scheme employer resolve to award extra annual pension up to a limit to a member dismissed by redundancy or business efficiency, so long as the resolution is made within 6 months of the date employment ended. Regulation 68(3) then requires the employer to pay a sum into the fund to meet that cost. The limit is £6,500 from 1 April 2014, rising each April.

Is the Scottish local government scheme different on strain?

The Local Government Pension Scheme (Scotland) Regulations 2018 follow the same pattern: regulation 29 covers redundancy from 55, and regulation 63 lets the administering authority require the employer to pay the extra charge. Northern Ireland has its own scheme, so ask that scheme for its rules.

What if my employer waives a reduction?

Regulation 30(8) lets an employer waive in whole or in part a reduction under paragraph (5) or (6), which cover choosing to retire early and flexible retirement; a redundancy pension under paragraph (7) is already paid without reduction. Where a waiver is agreed, paragraph (2) of regulation 68 lets the fund ask the employer to pay its cost as calculated by an actuary the administering authority appoints. Leaving without redundancy is covered in leaving the LGPS.

Keep your local authority redundancy letter handy for the call that an FCA-authorised adviser makes after you send in the enquiry form here; the pension start can then be laid beside your State Pension and savings.

Sources: Local Government Pension Scheme Regulations 2013 (SI 2013/2356), regulations 30, 31 and 68; Local Government Pension Scheme (Scotland) Regulations 2018 (SSI 2018/141), regulations 29 and 63; Finance Act 2022, section 10; LGPS member site, Redundancy or business efficiency; Greater Manchester Pension Fund, A guide to pension liabilities, pension strain costs and other costs.