All pension benefits built up since 1 April 2014 are based on the pensionable pay a member receives in each scheme year. A scheme year is the period from 1 April to 31 March.
Pensionable pay is the amount of pay on which contributions are deducted. From 1 April 2014 this includes all pay received in respect of overtime worked and any additional hours worked in excess of contractual hours. The benefits built up from 1 April 2014 are based on a CARE scheme formula:
Pensionable Pay (from 1 April to 31 March) X 1/49th
A 49th of the member's pensionable pay is put into their pension account every scheme year. Pension accounts are increased in line with an inflationary increase each year.
Pensionable pay includes:
- Basic Pay
- Contractual Overtime
- Non-Contractual Overtime (remains non-pensionable under the Final Salary regulations)
- London Weighting Allowance
- Shift Allowance
- Sleeping-In Allowance
- Statutory Sick/Maternity Pay (SSP & SMP)
Pay that is not pensionable includes:
- Travelling or Subsistence Allowances
- Pay In-Lieu of Notice
- Car Allowances
- Any payment made in consideration of a Loss of Holidays
- School Achievement Awards
The LGPS regulations define pay as being the total of all the salary, wages, fees and other payments paid to the employee for their own use in respect of their employment and any other payment or benefit specified in the contract of employment as being pensionable.
The official definition of Pensionable Pay under the 2014 LGPS regulations is as follows:
- Subject to regulation 21 (assumed pensionable pay), an employee's pensionable pay is the total of—
(a) all the salary, wages, fees and other payments paid to the employee, and
(b) any benefit specified in the employee's contract of employment as being a pensionable emolument.
- But an employee's pensionable pay does not include—
(a) any sum which has not had income tax liability determined on it;
(b) any travelling, subsistence or other allowance paid in respect of expenses incurred in relation to the employment;
(c) any payment in consideration of loss of holidays;
(d) any payment in lieu of notice to terminate a contract of employment;
(e) any payment as an inducement not to terminate employment before the payment is made;
(f) any amount treated as the money value to the employee of the provision of a motor vehicle or any amount paid in lieu of such provision;
(g) any payment in consideration of loss of future pensionable payments or benefits;
(h) any award of compensation (excluding any sum representing arrears of pay) for the purpose of achieving equal pay in relation to other employees;
(i) any payment made by the Scheme employer to a member on reserve forces service leave;
(j) returning officer, or acting returning officer fees other than fees paid in respect of—
(i) local government elections,
(ii) elections for the National Assembly for Wales,
(iii) Parliamentary elections, or
(iv) European Parliamentary elections.
IMPORTANT: Pensionable pay under the CARE Scheme includes both contractual and non-contractual overtime. However under the previous Final Salary pension scheme (pre 1 April 2014) non-contractual overtime is still deemed to be a non-pensionable element of pay. Therefore when calculating a Final Pay figure under these regulations you must only include contractual overtime in this calculation.
For more information please download our Pensionable Pay - Pension Pointers factsheet.
Salary Sacrifice - Car Lease
Under the LGPS regulations salary sacrifice through a Car Lease scheme is classed as non-pensionable. We would therefore be unable to count your sacrificed salary towards the calculation of your pension.
Under the LGPS you build up pension each year based on your annual pensionable salary divided by 49. For example based on an annual salary of £25000 the annual pension you build up each year is as follows:
£25000 / 49 = £510.20 annual pension
Under salary sacrifice your pension build up would be based on the pensionable pay after the car lease deduction has been made. Therefore if you paid £1800 per year/£150 per month (as an example) under salary sacrifice the pensionable pay that we then use in the calculation of your pension for that year would be £23200 (£25000-£1800 = £23200). Therefore your annual pension build up would be:
£23200 / 49 = £473.47 annual pension
Based on this example the difference in annual pension build up is £36.73 per year (£510.20 – £473.47)
Based on a salary sacrifice of £2000 per year (£166.67 per month) your pension build up would be as follows:
£25000 - £2000 = £23000
£23000 / 49 = £469.39 annual pension
Based on this example the difference in annual pension build up is £40.81 per year (£510.20 – £469.39)
Important - Please be advised that if you cease the salary sacrifice contract your pension will continue to build up on the reduced annual salary (post salary sacrifice value) even though your pay would have reverted back to normal. Similarly any previous pension built up under the final salary pension scheme (i.e LGPS pension membership up to 31 March 2014) will be based on the reduced salary sacrificed pay.
Final Pay Protections prior to 1 April 2014
Even though the scheme changed to a CARE arrangement from 1 April 2014 protection is in place to ensure members can use their final pay when they leave to work out their pension for the membership built up to 31 March 2014.
This means that any future pay increases are included in the final pay used to work out these benefits. The definition of final pay for benefits built up before 1 April 2014 remains the same as it was before the Scheme changed. The final pay is normally the pay in respect of the member's final year of scheme membership on which they paid contributions, or one of the previous 2 years if this is higher. This remains so from 1 April 2014.