Pension confusion? Let’s clear it up
The EAPF, is a fund of the Local Government Pension Scheme (LGPS) and is an attractive benefit for employees for many reasons. One appealing aspect of the pension scheme is this financial commitment from your employer, who, through their contributions to the Pension Fund, ensures that your pension is funded appropriately.
There are 2 main types of pension arrangements: Defined Benefit (DB) and Defined Contribution (DC). These are quite different, but we’re fortunate that the LGPS is a DB arrangement.
With a DB pension arrangement like the EAPF, there are many rules which govern the Scheme. You get a set income when you retire, based on your earnings and how long you’ve been a member. This means you can work out in advance roughly how much you’ll receive (depending on your estimated pay on leaving), giving you more peace of mind about your retirement. This set income means that contributions paid into the Pension Fund by both you and your employer during your employment do not impact the pension you receive.
On the other hand, with a DC pension arrangement - what you get when you retire depends on how much you and your employer pay in, plus how well those savings grow with investments. The final amount isn’t fixed, so it can go up or down, depending on how the market is performing at that time
How your pension builds up
If you’re in the main section of the Scheme, each year 1/49th of your pensionable earnings is added to your pension account, which is then revalued each April so that your pension keeps up with the cost of living. This means your pension won’t lose value over time.
Example
Alex earns £36,000 per year. During that year, he’ll build up pension savings of:
£36,000 divided by 49 = £734.69.
This is then revalued in line with the Consumer Price Index (CPI) to ensure it keeps pace with the cost living.
Based on this one year of membership, when he retires, he’ll receive the equivalent of £734.69 each year for the rest of his life (as revalued).
Contributions explained
Whilst both you and your employer make contributions to the EAPF, these contributions are paid into the fund to ensure there are sufficient funds to pay the benefits promised to you, and all the other current and future pensioner members.
These contributions do not have any direct bearing on the calculation of the benefits you’ll receive at retirement, because of the nature of a defined benefit pension arrangement.