Capitalisation costs

When an employee is made redundant and chooses to claim pension benefits, an employer’s responsibility to pay capitalisation costs is limited so the cost cannot exceed an employee’s redundancy payment.

A member is made redundant from NHS employment in England and chooses to take their pension immediately without reduction

The employer, the member, or a combination of both will meet the cost incurred of paying the unreduced pension. This is called the capitalisation cost. It depends on their profession and terms and conditions of the contract.

The redundancy payment is used to meet capitalisation costs and any further cost met by the employer.

Direction bodies and local authorities

Capitalisation costs may be payable by you, the member or in some cases, the NHS Business Services Authority. This would need to be referred to your own legal advisors and consideration made against the NHS Pensions Regulation.

Where the member’s terms and conditions provide, the redundancy payment must be used to cover any associated capitalised cost.

Interest of Efficiency (IOE) cases

If the reason for claiming their pension is in the IOE, you must pay the capitalised cost within one month from the date on which the member’s pension benefits become payable.

How capitalised costs are calculated

Capitalised costs are based on the difference between an unreduced pension and a pension reduced for early payment plus the cost of paying a lump sum early. These two amounts are multiplied by the factors provided by the Government Actuary’s Department (GAD). These factors are available on our retirement page.

What happens when costs are higher than the redundancy payment

If the capitalisation cost is more than the redundancy payment, the member must cover any remaining cost after using the employee redundancy payment. This is if they are subject to Agenda for Change terms and conditions or equivalent. The member cannot use any of their pension benefits to pay the capitalised cost shortfall.

The member must commit the whole of the redundancy payment and can then choose to:

have some of their benefits actuarially reduced to cover the shortfall
pay an additional contribution to meet all of the remaining costs
pay a lesser additional contribution to limit the actuarial reduction

When members keep their redundancy payment

The member can choose to keep the full redundancy payment and receive either:

immediate payment of benefits with full actuarial reduction
unreduced deferred benefits paid from their normal pension age

When capitalisation costs are lower than the redundancy payment

If the capitalisation cost is less than the redundancy payment, the member will receive the remainder of the redundancy payment after the full costs have been met.

If a member is in both pension schemes

Where members have pension entitlement in both the 1995/2008 Scheme and 2015 Scheme, the capitalised cost is determined as the sum of the costs calculated separately for each Scheme.

The redundancy payment must be used to first secure unreduced benefits from the 1995/2008 Scheme and any residue is then set against the capitalised cost of the 2015 Scheme.

If the member has an option to pay an additional contribution, the payment should be used first to secure lower or no reduction in benefits from the 1995/2008 Scheme before being allocated to secure a lower or no reduction in benefits from the 2015 Scheme.
You should also consider that:

members can select redundancy pension benefits for the 1995/2008 Scheme and defer their 2015 Scheme - the member can make a claim for their 2015 Scheme pension later
members can select redundancy pension benefits for the 1995/2008 Scheme and chose to take early retirement pension from the 2015 Scheme - they will keep any residue severance payment
in general, a member can make a separate selection providing they do not claim their 2015 Scheme on redundancy - if they do claim 2015 Scheme redundancy pension benefits, then both legacy and 2015 Scheme must be paid as redundancy, with the redundancy payment applied to legacy benefits first before any residue is applied to the 2015 Scheme.

Invoicing for capitalised costs

Where the member’s redundancy payment meets the capitalised cost or the member has not made an additional contribution, you must make payment to us within one month from the date on which the member’s pension benefits become payable.

If there is a shortfall in the payment and the member chooses to make an additional contribution, they must pay the additional amount to you. An invoice will be sent to you, and payment must be made to us no later than one month before the member’s pension becomes payable.

Make sure that invoices are paid as soon as possible to avoid any delay in the processing and payment of a member’s pension benefits.

Members who have more than one employment may decide to retire from all their employments and claim their pension benefits. In these circumstances, the employer that is making the member redundant is responsible for meeting the cost of paying pension benefits early.

Substitute or revised awards

Increases in the capitalised cost

There can be a few results when the revision increases pension benefits.

You must recover any residue redundancy payment that may have been given to the member to meet the revised capitalised cost. If the member chooses to make or increase their additional contribution, they must pay this to you.

The redundancy payment continues to meet the revised capitalised cost. A new invoice will be raised by us for payment of the extra amount and sent to you.

If the redundancy payment no longer covers the capitalised cost

If the member’s redundancy payment is subject to Agenda for Change terms and conditions, you must discuss with the member whether they would like to make an additional contribution or receive the extra amount of pension benefits with a reduction for early payment.

This applies to England only. Welsh Agenda for Change are exempt and fall into all other circumstances. In all other circumstances the employer will meet the additional amount owed.

Managing previous member contributions

If the member has made an additional contribution before but the revision increases the difference between the capitalised cost and the redundancy payment, you must ask the member if they would like to:

pay a further additional contribution to cover the cost of the increase in pension benefits now due
make no further contribution and have the additional benefits reduced for early payment

The revision of the additional contribution will be limited to the extra payment payable.

Decreases in the capitalised cost

If the revision decreases the pension benefits:

the employer must pass any excess monies returned if the cost is met by the severance payment and there is residue when compared to the original redundancy payment
the revised capitalised cost continues to be met by the redundancy payment
any excess charge will be noted as a credit on the employer’s record, and the employer can then request a refund of the credit amount - this can be paid either as a bank transfer, or to be used as credit against another outstanding invoice but this cannot be used to offset employer contributions.

If a member overpaid pension contributions

If a member has made additional pension contributions and is considered overpaid due to a redundancy calculation revision, we'll need a credit note to be able to adjust the charges to the employer.

If a refund is due to the member in respect of the additional contributions, the employer can add in a minus adjustment to their contribution submission via MCP/RFT1/GP1. They must make sure that they are added to the months where the contributions were first paid and use the correct contribution type, which is Additional Pensions (Add Pen).

If the employer uses POL and the additional pension was paid over in more than one month then refund forms would need to be completed instead. You can have copies provided by contacting the NHS Pensions Finance Team.