Ill health retirement

Employers must manage the difficult and sensitive area of ill health in the workplace efficiently and effectively, whilst balancing the needs of the employee, the organisation and the pension fund. They must take account of employment law and disability discrimination legislation and be fully aware of the LGPS ill health retirement regulations when making any decision affecting a contributing or deferred member of the LGPS.

Regulatory Framework

• LGPS Regulations 2013 – Reg 35 – Early payment of retirement pension on ill health grounds: active member
• LGPS Regulations 2013 – Reg 38 – Early payment of retirement pension on ill health grounds: deferred and
  deferred pensioner member
• LGPS Regulations 2013 – Reg 36 – Role of the Independent Registered Medical Practitioner
• CLG Statutory Guidance – employers must have regard to this guidance when carrying out functions in relation
  to ill health retirement

Ill Health Criteria
To qualify for an ill health pension, employees must be or have been a member of the LGPS and:

• Have two years membership in the Scheme or be deemed to have achieved this, or
• Hold a Deferred Benefit in the Scheme
• Be permanently incapable (until normal retirement age) of doing their current job or former job
• Be unlikely to be immediately capable of undertaking gainful employment
• Gainful Employment

Schedule 1 defines gainful employment as paid employment for:

• Not less than 30 hours per week
• For a period of not less than 12 months

Independent Registered Medical Practitioner (IRMP)
An independent Doctor must complete an ill health certificate certifying whether, in his or her opinion, the employee meets the ill health criteria or not. Must be qualified in occupational health medicine and be approved by Cheshire Pension Fund. They must also certify that they have not previously been involved or advised on the case.

Ill Health Certificates
Cheshire Pension Fund suite of certificates can be found here.

Relevant Dates for Payment of Ill Health Benefits
For both Active and Deferred Members, this date is determined by the employer

• Active Member – this is used as the date of retirement (termination of employment)

Under regulation 38 previous employees with a deferred benefit can apply for early release of the benefit on health
grounds and employers can decide to release the unenhanced benefit from the date they determine the member
became permanently incapable of that former employment. The date should be determined as follows:

• Member left before 01/04/1998 (use pre 2008 certificate) this is the date the IRMP certifies the member met
  the “permanency criteria”
• Member left between 01/04/1998 and 31/03/2008 (use pre 2008 certificate) this is the date the member made
  their application
• Member left on or after 01/04/2008 and before 01/04/2014 (use post 2008 – pre 2014 certificate) this is the
  date the IRMP certifies the member met the “permanency criteria”
• Member left after 31/03/2014 (use post 2014 certificate) this is the date the employer determines the Ill Health
  benefits should be released

Benefit Tiers
Only applies to Active Members and decided by the employer:

• Tier 1 – the employer has decided to terminate the member’s employment on the grounds that their ill health
  or infirmity of mind or body renders them permanently incapable of discharging efficiently the duties of their
  current employment and, because of that condition, the member is unlikely to be capable of undertaking
  gainful employment before normal pension age.
  Benefits are enhanced by an amount equivalent to, that which the pension member would have accrued
  between the date of termination of employment and normal pension age, based on an assumed pensionable
  pay. Tier 1 – benefits are payable for life and not reviewed.
• Tier 2 – the employer has decided to terminate the member’s employment on the grounds that their ill health or infirmity of mind or body renders them permanently incapable of discharging efficiently the duties of their current employment and, because of that condition, the member is unlikely to be capable of undertaking any gainful employment within three years of leaving the employment but is likely to be able to undertake gainful employment before reaching normal pension age. Benefits enhanced by one quarter of the tier one enhancement.  Tier 2 – benefits are payable for life and not reviewed.

• Tier 3 – Reasonable prospect of being capable of undertaking gainful employment within 3 years of
  leaving. Tier 3 – benefits are not enhanced, paid until the member obtains further gainful employment, reviewed after 18 months and paid for a maximum of three years.

Tier 3 Review
Conducted by the employer when the tier 3 pension, has been in payment for 18 months.

• Stop the pension if the member is found to be in gainful employment.
• Obtain a further medical certificate from an IRMP if not in employment.
• Based on the member’s capability of undertaking gainful employment either stop the pension immediately or 3
  years after the date of leaving or uplift to a tier 2 benefit.

Tier 2 Uplift

• This can happen at any time while the tier 3 benefits are on-going, or up to 3 years after they have been
  discontinued.
• Must relate to the medical condition that resulted in the award of a tier 3 pension only.
• Any uplift (additional 25% of potential pension earned to normal pension age) is paid from the date of the
  review and there is no option to commute to a lump sum.

Terminal Illness
In the majority of cases, ill health retirement provides the best overall “financial package” for the member so speeding
up the process is crucial. Employers should fast track the case with their Occupational Health providers and ask Cheshire
Pension Fund for estimates in these very sensitive cases. Death occurring before employment is terminated will result in
a death in service benefits.

Employer

• Manages their internal sickness absence procedure.
• Decision to terminate a member’s employment on ill health grounds.
• Refers the employee to an Independent Registered Medical Practitioner (IRMP).
• Obtains the IRMP medical opinion and certificate.
• Obtains the IRMP medical opinion if the member has worked reduced hours due to ill health.
• Determines the tier of ill health benefit and the member’s termination date.
• Notifies Cheshire Pension Fund of its decisions and requests relevant estimate.
• Issues the member with the estimate and obtains the member’s certificates and relevant retirement forms.
• Provides Cheshire Pension fund with the leaver form and the member’s retirement forms and certificates.
• Decides whether to release a deferred members benefit early on ill health grounds.
• Conducts the 18 month review of 3rd tier pensions.
• Manages the 1st stage of the Internal Dispute Resolution Procedure (IDRP).

Cheshire Pension Fund

• Approves the IRMP.
• Provides guidance to the employer.
• Produces the estimate for the employer to issue.
• Processes ill health retirement on receipt of accurate and complete forms.
• Manages the 2nd Stage of the IDRP.

Doctor (IRMP)
Independent Registered Medical Practitioner (IRMP) approved by Cheshire Pension Fund.

• Qualified in Occupational Health.
• Has no previous involvement in case.
• Gives a medical opinion if the employee meets the criteria for ill health retirement.
• Gives a medical opinion if the member has worked reduced hours due to their ill health.

Internal Dispute
Resolution Procedure (IDRP)
The LGPS two stage appeal process which is often raised when members disagree with the ill health benefit decision.

• Stage 1 – to employer
• Stage 2 – to administering authority

The Local Government Pension Scheme (LGPS) in April 2008 introduced a three tiered ill health structure, and this has been carried forward into the 2014 scheme. One of the biggest changes was the introduction of a temporary 3rd Tier short-term pension which is not enhanced and with payment capped to a maximum period of 3 years (unless the member reaches Normal Pension Age during that period).

Framework of Tier 3

Qualification for Ill health pensions
To qualify for any ill health pension the member must have had two years membership in the scheme (or be deemed to have had two years).

What is a Tier 3 ill health retirement?
Tier 3 provides a reviewable pension for a member whose former employer terminates their employment because, as a result of ill-health or infirmity of mind or body, they are permanently incapable of discharging efficiently the duties of the employment the member was engaged in and is not immediately capable of undertaking any gainful employment, but is likely to be within a period of three years. Gainful employment is defined as paid employment for not less than 30 hours a week for 12 months.

How is a Tier 3 benefit calculated?
The pension is calculated on the member’s accrued membership at the point their employment is terminated on medical grounds. The member will also receive a lump sum if they have membership before 1 April 2008 and/or opt to commute pension to provide one.

Tier 3 Review

Member responsibilities and Employer inquiries
The member receiving Tier 3 benefits must inform the former Scheme employer upon starting any employment while the benefits are in payment and must answer any reasonable inquiries made by the authority about employment status including questions on pay received and hours worked. If a member fails to answer these inquiries the employer can stop the pension. The employer can determine that a member’s employment can be reasonably judged to be likely to continue for 12 months even if it does not.
If you require any further information, please contact us using the details below.

Why is there a review for Tier 3 ill health retirement?
A Tier 3 benefit is an interim pension payable for a maximum of 3 years or until the member returns to work. It is not payable once gainful employment is found. The employer will need to check the member’s employment status where payments have continued for 18 months (1st
mandatory review). Payments will stop if gainful employment has been obtained. If it is established that the member is not in gainful employment at the review the employer must obtain a further medical certificate from an independent registered medical practitioner (IRMP).

When is the Tier 3 review carried out?
When the benefits have been in payment for 18 months. If a member reaches Normal Pension Age during that period, they are exempt from the review although the benefit will be stopped if further gainful employment is found during that 18 month period.

Who carries out the Tier 3 review?
The previous employer, or successor body must check the Tier 3 member’s employment status if payments have continued for 18 months. The Cheshire Pension Fund will notify employers of any members approaching the review date, one month before that review date.

How many times does the employer undertake a Tier 3 review?
The employer is only required to undertake a review once, when payments have been continuous for 18 months. There is no requirement to undertake a further review but the case can be looked at again in the light of further medical evidence – please note there is no review required for Tier 1 and 2 ill health benefits.

What does an employer need to do at the review stage?
The employer will need to obtain a further certificate from an IRMP as to whether, and if so when, the member will be likely to be capable of undertaking gainful employment and make a decision on the Tier 3 pension.

Employer’s review decision
The employer can make the following decisions at the review, which must be supported by the IRMP certificate:

Where the member is judged to still be incapable of gainful employment

• To continue payment for any period up until the 3 years limit
• To uplift the 3rd Tier pension to a permanent 2nd Tier Ill Health pension

Where the member is judged to now be capable of gainful employment

• To cease the pension

Continuing payment for up to 3 years

Tier 3 payments can continue up to a maximum of three years after the date of termination of employment.
If you require any further information, please contact us using the details below.

Uplifting a 3rd Tier pension to a 2nd Tier pension
Where the medical assessment justifies this, the employer can decide to award an enhanced Tier 2 benefit from the date of the decision. If the employer decides to uplift a member to a Tier 2 benefit then the member will be awarded an enhancement to their benefit of 25% of their potential membership from date of leaving to Normal Pension Age. There may be tax implications for the award of the enhanced 2nd Tier pension. Full details are available from HMRC’s website www.hmrc.gov.uk.

Ceasing the pension:
What happens to the pension if the member has obtained work when the employer conducts the review at 18 months?
The employer is required to stop payments if the member is either employed in gainful employment as defined in the LGPS regulations or at review is deemed capable of gainful employment. The employer should notify the Cheshire Pension Fund without delay (by completing part 2 of the Tier Three – 18 month medical review certificate) that the member’s pension payment should be stopped and whether any overpayment is to be recovered.

What happens if the member fails to respond to the former employer’s enquiry?
If an employer has written to a member at the review stage and not received a response, they should check whether the Cheshire Pension Fund has received a change of address notification. If, despite reminders, no response is received from the member, it is considered reasonable to stop payments until the position has been clarified.

What happens if the member finds work some time before the 18 month review and then fails to inform their previous employer?
Any payment made after the member has returned to gainful employment can be regarded as an overpayment and the former employer has powers to recover that overpayment. However, if the employer has to seek further information to be able to assess whether the employment is gainful employment as described in the regulations, they can consider stopping the pension until that further information is received.
Recovered overpayments are the gross amount paid to the member and should be returned without delay to the Pension Fund. The member will be able to reclaim any tax paid on these payments from HMRC. If the former employer considers that an overpayment has been made but then chooses not to seek recovery, or is unsuccessful in recovering the overpayment, this would result in the payment being an unauthorised payment (unless the payment was made in error and was for less than £250 gross). Further details on this are available from the Cheshire Pension Fund.

Should the former employer tell the member when their Tier 3 payments are stopped?
Yes, if Tier 3 benefits are stopped the employer should tell the member, in writing, why and from what date. For example, if payments are stopped due to a return to paid employment, the employer should inform the member that the paid employment is ‘gainful employment’ as described in the regulations. The employer also needs to inform the Cheshire Pension Fund to promptly stop the member’s pension and the reasons why.

Stopping 3rd Tier pension payments

Why are payments stopped after 3 years?
This is consistent with the eligibility criteria where a member is judged capable of undertaking any gainful employment within three years. A Tier 3 pension is a short term benefit to provide financial assistance until such time as gainful employment can be, or is, found. It is not the intention that a member, whose medical condition requires payments beyond three years, should remain a Tier 3 member and the employer has powers to consider an enhanced Tier 2 pension at the 3rd Tier review. Even after Tier 3 payments have been stopped a further determination can be made under Regulation 37(10) where the original medical condition justifies this, but this is limited to within three years of it ceasing.

Can Tier 3 payments be stopped regardless of whether a review has been undertaken or not?
If payments continue until the review date, they cannot be stopped until an 18 month review is undertaken. It follows therefore, that although Tier 3 payments stop after three years, if they are paid for the full period, they cannot be stopped at any point up to the three year threshold without a review having taken place. The exception is where the member has obtained gainful employment.

Does the employer need to notify the Cheshire Pension Fund when payments stop?
Yes and promptly. The former employing authority should notify the Cheshire Pension Fund without delay when Tier 3 payments need to be stopped and also give the reason i.e. that gainful employment has been found, or after the review when the member is judged immediately capable of undertaking any gainful employment, or when the payments stop because they have been paid for three years.

Need for Certification by Independent Registered Medical Practitioner (IRMP) qualified in occupational health medicine
Can the independent doctor who gave the medical assessment that resulted in a Tier 3 award, undertake the second medical assessment at the 18 month review?
Yes. The same doctor can sign the ill health review certificate that gave opinion in the first determination, but the same doctor cannot sign the certificate indicating an uplift to Tier 2 benefits. A pragmatic approach may be to employ a completely new doctor to undertake the Tier 3 review.

Can a Tier 3 member whose payments have stopped ask for pension payments to resume if the reason relates to the condition that resulted in the Tier 3 award?
In certain circumstances yes, but there can be no future entitlement to 3rd Tier payments. If the condition that originally resulted in a Tier 3 pension subsequently merits such an award, the member can apply for reconsideration of their ill-health and the employer will need to seek a further independent medical assessment. Where the medical condition justifies it, the employer can agree to an enhanced Tier 2 retirement pension from the date of the assessment. Any further application must be made within 3 years of the original Tier 3 benefit ceasing.

Other relevant issues

Would a lump sum be payable again if a further determination to a Tier 2 pension is made?
No. The termination of employment on ill-health grounds and award of Tier 3 benefits triggered a benefit crystallisation event with early release of retirement benefits and a lump sum payment. A member whose Tier 3 benefits have stopped is classed as a pensioner member and, therefore, any future entitlement to ill-health retirement benefits in respect of the ill-health condition that resulted in Tier 3 benefits, is likely to be a 2nd Tier award which has an enhancement of 25% of prospective membership to Normal Pension Age. It is based on a 1/49th accrual rate with no option to commute pension for an additional lump sum.

Can a Tier 3 member whose benefits have ceased ask for release of retirement benefits under Regulation 38(4) of the 2014 Regulations for an unrelated condition?
Yes. A pensioner member whose Tier 3 benefits have ceased and who has ‘deferred’ benefits is not precluded from applying under Regulation 38(4) as a result of a medical condition unrelated to the condition that resulted in a tier 3 award.

Can a Tier 3 member be uplifted to the enhanced Tier 2 with a condition other than that which resulted in the ill health retirement?
No. The regulations are quite clear that it is the initial condition resulting in an ill health Tier 3 payment that should be considered when assessing a possible uplift to a Tier 2 pension.

Can the employee return to a local authority or another LGPS employer?
A former member who has been awarded a Tier 3 ill-health benefit is not expected to return to that employment but they are not prevented from obtaining other employment with a local authority or LGPS employer.

Can a member receive their retirement benefits without retiring on ill-health grounds if they are over 55 but would have been a Tier 3 member?
It is the employer who has to determine the reason for terminating employment. An employer may wish to consider not terminating the member’s employment on ill-health grounds and, in this instance, where existing protections apply, permit the early release of unreduced retirement benefits.

As a participating employer within the Cheshire Pension Fund (“the Fund”), you will be aware that the Local Government Pension Scheme (the “LGPS”) provides a valuable benefit for your employees. However, this requires you, as an employer, to meet any obligations to the Fund in respect of the pension costs for your employees.

Many employers are becomingly increasingly aware of the risks of participating within the LGPS. One such risk causing concern is the cost associated with the ill-health early retirement of one (or more) of your employees.

The Fund monitor the costs of ill-health early retirements and reserve the right to request additional payments from employers where ill-health experience exceeds the Actuary’s expectations. Even where immediate payment is not requested, all things being equal there will be an increase in the contributions required following the next formal valuation to fund the cost of the ill health retirement(s).

I have attached a briefing note from our Fund’s Actuary Hymans Robertson discussing the risk and potential costs of an ill-health early retirement. The briefing note discusses the opportunity to purchase ill-health liability insurance (through Legal and General) to mitigate against this risk and provides details of the ill-health insurance solution.

We are pleased to let you know that the Cheshire Pension Fund has obtained an ill-health insurance quote on behalf of the Fund’s employers and this insurance option is now available to employers in the Cheshire Pension Fund.

What will it cost?

The premium paid to Legal and General will be off-set against your contributions to the Fund. Therefore, it is cost-neutral for employers who decide to purchase the insurance.

The premium payable to Legal and General would be £1.25 per £100 of your employee’s salary roll i.e. 1.25% of payroll.

The above rate is based on a take-up rate of less than 40% of the Fund’s total salary roll. The rate will reduce should the take-up rate exceed this. The policy premiums can be paid to Legal and General Premiums monthly or annually.

How will it work?

On providing the Fund’s administrators with evidence that the employer has purchased the insurance, the employer’s ongoing contribution rates payable to the Fund will be reduced by the amount of the premium e.g. 1.25% of payroll.

The Fund’s administrators will monitor the employer’s ill health experience and should the employer suffer an ill health retirement, the administrator will invoice the employer for the cost of the ill health.

The employer will then claim against the insurance policy to pay the invoice and make a special contribution into the Fund. The cash receipt will be credited to the employer’s account within the Fund and will offset the negative impact of the ill health retirement at the next valuation.

The insurance is not compulsory and for those employers who opt not to take out the insurance, the Fund will continue with the current policy of not invoicing for the cost of ill health retirements. However, the employers actual experience of ill health retirements against the actuary’s assumptions will be measured at the next valuation. This experience (positive or negative) could have a positive or negative impact on the employers funding level and contribution rates.

Although this is in line with current policy, the Fund reserves it’s right to review this policy in the future.

What to do next?

Ultimately the decision to purchase ill health insurance is the employer’s alone, and the Fund’s administrators cannot provide advice as to the merits of individual employers taking such insurance.

Employers are encouraged therefore to read the briefing note and also the Legal and General brochure and Technical Guide in detail before forming an opinion.

There is also an employer specific webpage with further details of the insurance here.

If you wish to proceed with purchasing ill-health insurance please contact the IHLI Administration team at IHLI@hymans.co.uk. Hymans Robertson will inform the Fund on your behalf.

IHLI – Employer Briefing Note (PDF 235KB).

IHLI – Legal and General technical guide (PDF 947KB)

Legal & General have agreed to offer a free Employee Assistance Program to all Employers who proceed with Ill Health Early Retirement cover. This allows employees to call the Employee Assistance line at any time to talk through any problems that might be worrying them; from faulty goods bought, to matrimonial problems, tenancy issues or even driving offenses.

Employee Assistance Program (Brochure) (PDF 602KB)

Employee Assistance Program (Poster) (PDF 602KB)