The ARBO cost for a classic or classic plus member retiring early should be considered as the sum of two components: the cost of buying out the reduction applied to the member's pension (the 'Pension cost'), and the cost of buying out the reduction applied to the member's lump sum (the 'Lump sum cost').
The cost of buying out the actuarial reduction applied to the member's pension should be calculated as:
Pension cost = [P x Fx x (1 + PI)] - (P x PI x Gx)
Where:
x is the member's age at retirement date in years and complete months
P is the unreduced pension at retirement. The pension consists of a member's Main Pension, any Added Pension bought and (where relevant) the Transfer In pension.
Fx is the relevant factor for a member aged x, taken from:
- P1ARBO60 (Table 1-712 in the consolidated factors workbook) for a member with NPA 60
- P1ARBO65FS (Table 1-713 in the consolidated factors workbook) for a member with NPA 65 (we understand that there are a small number of classic members with an NPA of 65)
Gx is the relevant factor for a member aged x, taken from P1ARBOGX.
PI is the rate of pension increase (PI rate) from the 'Deemed Date for Pension Increase' to the published increase date preceding the date of early retirement, as provided for under the Social Security Pensions Act 1975 (as amended). The PI rate is calculated as:
PI rate = (PI multiplier - 1)
where the PI multiplier applies from the Deemed Date for Pension Increase to the published increase date preceding the early retirement date.
The PI multipliers are published by HM Treasury in the tables: "Pensions increase multiplier tables" each year. The multipliers in the tables are in the form of one plus the pension increase percentage. This means the amount of pension after the increase is found by multiplying the current pension by the multiplier.
The cost of buying out the actuarial reductions applied to the member's lump sum should be calculated as:
Lump sum Cost = LSR + [PI x LSR x Hx]
Where:
LSR is the lump sum reduction (i.e. 'unreduced lump sum' - 'reduced lump sum'). The reduced lump sum is the amount of lump sum the member would be entitled to at retirement if they chose not to buy out the actuarial reduction.
Hx is the relevant factor for a member aged x, taken from P1ARBOHX.
The total ARBO cost of a classic or classic plus member is then the sum of the pension buy out and lump sum buy out components:
ARBO cost = Pension cost + Lump sum cost
The calculations above are done before the member commutes pension for lump sum and before offsetting any divorce or scheme pays debits.
