The value of any EPA option is to be taken into account when assessing whether a member can purchase (additional) added pension under the alpha scheme.
A member is only able to purchase (additional) added pension if there is available 'headroom'. This is assessed by comparing the value of any 'extra pension' (EPA options plus any accrued added pension) against the 'overall limit of extra pension' ('headroom limit') as set out in the Regulations.
A member is only allowed to purchase an EPA option if, at the commencement of the contract (i.e. when the initial application for an EPA is submitted), the existing total extra pension is less than the overall limit on extra pension (i.e. there is headroom available). In other words, a member can purchase an EPA option if prior to purchase there is headroom, even if the purchase of the option would mean that they subsequently exceed the limit on extra pension.
A member is only allowed to purchase (additional) added pension if the total extra pension (including the added pension the member intends to purchase) is less than the limit on extra pension at the commencement of the contract (i.e. there is headroom available to cover the expected additional added pension).
A 'prospective' EPA option will be valued (by converting it into an equivalent added pension) at the start of the contract. When valuing the option it is assumed that the member continues to contribute to this option until their respective earlier pension age is reached (the purchase of the EPA option is automatically renewed at the start of each scheme year).
The value of the option will not be recalculated for:
- any change to a member's actual NPA through new legislation;
- in response to future changes in headroom methodology or early retirement factors;
- or for the actual salary growth experienced by a member.
Should a member cease contributing to the option before their earlier pension age is reached then the value of that option is no longer the prospective value determined at the start of the contract. The 'accrued' value of this EPA option should be based on the period during which EPA contributions were actually paid in respect of the option and not the full period to earlier pension age assumed when determining the prospective value of the option.
Calculations are required for:
- determining the value of an EPA option at the outset of the contract, and
- determining the value of an accrued EPA option.
The headroom calculations effectively assume that part-time members will continue to work the same proportion of part-time hours for the remainder of their careers (full-time equivalent pensionable earnings are not used in the calculation).
The Regulations set out that where a member ceases to be in pensionable service under the Scheme and then re-enters after a gap in pension service of less than 5 years the EPA contributions can resume (subject to certain restrictions) without re-assessing their value against the headroom limit.
The relevant factor tables are:
- Table P2HR1 (Table 720 in the consolidated factors workbook) - prospective accrual accumulation factor
- Table P2HRRev1 (Table 721 in the consolidated factors workbook) - revaluation factors
The main data required is:
- Option commencement date (i.e. the date the initial application for an EPA is effective from)
- Member's NPA in years and complete months
- Member's EPA in years and complete months (i.e. relating to option being purchased)
- Member's pensionable earnings at option commencement date
The prospective value assessed assumes that the member continues to contribute to the EPA option until the respective earlier pension age is reached. The calculation to determine the value of the prospective EPA option is set out in a three stage process:
Stage 1: Estimate the prospective pension arising from future accrual at EPA
Prospective pension = Pensionable Earnings x P2HR1 factor
Where:
Pensionable Earnings is as defined in the Regulations.
P2HR1 factor is taken from Table P2HR1 appropriate for the period (in years and complete months, ignoring part months) between option commencement date and EPA.
Stage 2: Converting the prospective pension into equivalent added pension at EPA
Equivalent added pension at EPA = Prospective pension × [( 1 / P2ER factorNPA) - 1)]
Where:
P2ER factorNPA is the early payment reduction factor from the early payment reduction guidance at the member's age at EPA (in years and complete months) taken from the P2ERXX table relevant to the member's NPA. If a member has a non-integer NPA then more than one factor is required and these factors are interpolated to obtain the actual factor to use.
Stage 3: Expressing the equivalent added pension at EPA as an equivalent added pension at option commencement date (ie the value of EPA option at outset)
Value of EPA option at outset = Equivalent added pension at EPA / P2HRRev1 factor
Where:
P2HRRev1 factor is the factor appropriate for the number of years (ignoring part years) between the option commencement date and EPA.
It is assumed that a member will continue to contribute to the EPA option until the respective earlier pension age is reached. The prospective value of an EPA can be expressed as a percentage of the headroom limit in place at the outset of the contract. The formula is set out below:
Value of EPA option at outset as % of headroom limit at outset = Value of EPA option at outset / Headroom limit at outset
Where:
Value of EPA option at outset is calculated from the three stage process above.
Headroom limit at outset is the overall limit of extra pension at EPA at option commencement date.
When an EPA option lapses (i.e., contributions stop before selected EPA), then the prospective value of the EPA option should no longer be used. Any subsequent test against the headroom limit should use the accrued value of the EPA option.
The accrued value is determined as a simple pro-rata calculation of the original prospective value of the EPA option based on the number of monthly EPA contributions that had been paid divided by the number of monthly contributions that would have been paid between the EPA commencement date and date of original EPA.
This calculation is applied to the percentage of headroom limit that was determined for the original prospective EPA option.
The formula is set out below:
Value of accrued EPA option as a percentage of headroom limit = Value of EPA option at outset as a percentage of headroom limit at outset x [M / N]
Where:
Value of EPA option at outset as a percentage of headroom limit at outset is as calculated in Stage 3 above.
M is the number of monthly EPA contributions paid
N is the number of monthly contributions that would have been paid between the EPA commencement date and member's original EPA.
Should the value of accrued EPA options be required at a later date then the proportion of the headroom limit can simply be applied to the level of headroom limit in force at the later date.
