Agenda item

When a scheme member is retired early due to permanent ill health, the member’s accrued pension benefits are paid immediately without reduction and, in the majority of cases, with an enhancement to benefits.

The cost of providing an ill health pension can be substantial and therefore a significant financial risk to fund employers. Legal and General have developed an insurance product to insure against this risk which can be taken out by individual employers or on a whole fund basis. This report seeks approval from the Pension Fund Board to insure against the financial risk of ill health retirements on a whole fund basis.

Declarations of Interest:

None.

Key Points Raised During the Discussion:

1.    The Pensions Manager introduced the item, explaining that now appeared to be an appropriate time to consider insuring against ill health retirement costs because individual cost of ill health retirements would increase with the new LGPS coming into effect in April 2014, while Legal & General had recently significantly reduced their premium rates from 0.85% to 0.63%.  He also explained that purchasing a policy on a whole fund basis would result in lower premiums and easier administration. It was proposed that before contractually committing the Council, procurement advice would be sought from the Head of Procurement.

2.    Members asked whether the costs of ill health retirements once the pension accrual rate had been increased to 1/49^th could be calculated.  The Pensions Manager stated that it would be costly to undertake that calculation at this time but that the cost to the Fund would increase.

3.    Members asked for clarification that all employers would not need to agree before this insurance was taken out.  Officers confirmed that this was the case.

4.    In response to a query, the Chairman agreed that the risk of ill health retirements was greater for smaller employees than for the County Council but stressed the paternalistic purpose of the Pension Fund Board.

5.    Members queried the impact on the employee of having to wait a period of time for the insurance company to settle a claim.  Officers assured the Board that this insurance would not impact on the employee’s right to receive an ill-health pension as the employee has a statutory right to their pension.  The Fund would pay this and then negotiate with the insurance company for reimbursement.  If there is any prevarication with claims, this would be reported back to the Board and the decision could be taken to stop using the company.

6.    Members asked if the insurance covers all eventualities.  Officers confirmed that the insurance would cover all Tier 1 and Tier 2 retirements. 

7.    It was suggested that this insurance was not a good deal for the Fund as staff were not in risky employment such as mining.  However, it was also acknowledged that there was an increasing trend for ill health retirements. The Pensions Manager also highlighted the potential risk to the Pension Fund if small employers went out of business because of the cost of ill health retirements. 

8.    There was a query about whether insurance would lead to changes in behaviour; for example, whether employers would be more likely to agree to ill health retirements.  The Pensions Manager informed the Board that an independent medical practitioner had to sign off on an ill health retirement and that it was very difficult to put pressure on them to approve an unnecessary retirement. 

9.    The possibility of running an internal pooling arrangement to self-insure against ill health retirements was discussed.  This would avoid the Fund being exposed to the profit element of the insurance business.  The Pensions Manager informed the Board that the actuary had been asked about the feasibility of self-insurance but that his view was that this was not feasible.  There was some support for looking at the option of self-insurance further. 

Actions/Further Information to be Provided:

None.

Resolved:

That a further report on ill health insurance be brought back to the next meeting, including information on the self-insurance option (Action Review ref: A12/13).

Next Steps:

None.

The Surrey Pension Fund Board adjourned its meeting at 11am and reconvened at 12.30pm.