Under most construction contracts, the contractor takes on the ground conditions risk. However, a recent case has demonstrated that the risk can fall on the employer.
Employers admitted to the LGPS should therefore review their policies on how they exercise discretions under the LGPS to ensure that the policies are up to date, achieve value for money and protect the employer’s reputation.
In the LGPS staff can retire early from the age of 55. Even though the pension will be reduced to reflect the fact that the employee has retired early, employers have a discretion to waive that reduction. In this situation, there will usually be a cost to the employer. The pension fund may ask the employer to make a one off payment to the pension fund to cover the cost to the pension fund of waiving the reduction to pension benefits. These payments can be very substantial, amounting to tens or occasionally hundreds of thousands of pounds.
There can be reputational and other costs for employers as well. The fall-out from allowing early retirement and waiving reductions to pension benefits can include criticism from regulators if they take the view that the employer has failed to manage the risks of early retirement appropriately.
All employers admitted to the LGPS are required to have a policy governing how they will exercise certain discretions in the LGPS. This policy must include a statement on when staff will be allowed to retire flexibly and when actuarial reductions may be waived. Given changes to the regulations governing the LGPS from 1 April, all LGPS employers should be taking this opportunity to review their policies on the exercise of discretions to ensure that they appropriately manage the risks to the employer. Employers are required by the new LGPS regulations to provide a new policy statement by 1 July 2014.
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