Making elements of pay pensionable
Making elements of pay pensionable
10.1.1 This section tells you what you need to consider if you are thinking about:
- making elements of pay pensionable
- consolidating elements of pay into basic pay
In all cases, you must get authorisation from The Pension Schemes Executive (TPSE) before you implement any changes. Please contact: TPSEreferrals@cabinetoffice.gov.uk.
10.1.2 As a general rule, only permanent elements of pay are pensionable. It is not possible to draw up any exhaustive list of pensionable allowances, since whether an allowance is pensionable often depends on individual circumstances.
10.1.3 Changes in pay and pay-related terms and conditions of service can affect a member’s level of pension benefits in an excessively beneficial or detrimental way. This is because classic, classic plus, premium and some linked or transferred-in elements of nuvos and alpha benefits are based on final salary. This includes banked service linked to the alpha scheme for members who moved into alpha on or after 1 April 2015.
10.1.4 Basic pay normally increases each year. The ASLC mechanism ensures that you pay the pension costs associated with such increases. However, where basic pay significantly increases or, for example, allowances or bonuses become pensionable, the payment of ASLCs may not cover the cost of the benefits. The value of the extra benefit to the member could be considerable. Such benefits that enhance an individual’s pay or a specific group of members pay are generally not allowed. There may be special circumstances that would allow such a payment and past service costs would be due under these circumstances. It must be remembered that making such payments will be leaving yourself open to legal action under discrimination laws and you must seek legal advice before you contact Cabinet Office, The Pension Schemes Executive, for approval of any such allowances.
10.1.5 ASLCs assume average pay progression. They do not take account of step changes in pensionable earnings. Where such changes take place, the ASLC will cover the future service pension cost, but not the liability for the earlier reckonable service. (For example, a classic member aged 59 with 39 years’ service who received a £1,000 one-off increase in pensionable earnings will benefit by an increase in their annual pension of £1,000 x 39/80 = £487.50 in addition to the pension earned for the current year.) For a member with short service the impact on pension would be much less.
The cash value of the impact on benefits is known as the ‘past service costs’. In the above example, the past service cost to the scheme of meeting the £487.50 increase would come to around 8 to 10 times the increase in pensionable earnings. Where pay restructuring results in past service costs, you will have to pay them.
10.1.6 Conversely, if a member’s pensionable earnings reduce, the value of the pension benefits they have already accrued can reduce as well as those that they could earn in the future. An example is where basic pay is reduced in exchange for more generous overtime payments (which are non-pensionable). In such circumstances, you would need to explain the detrimental effect of such a change to those affected and ask them to agree to the change.
10.1.7 Non-consolidated payments are awards made to staff that are not included in basic pay in future years. They are usually one-off performance related payments that have to be ‘re-earned’ every year. Normally they are non-pensionable. The Minister for the Civil Service has discretion to treat non-consolidated pay as pensionable. In practice, Cabinet Office, The Pension Schemes Executive, carries out this work on the Minister’s behalf. If you are considering making an element of non- consolidated pay pensionable, you must first get authorisation.
10.1.8 You should be aware that it does not always benefit members (particularly with classic benefits) to make non-consolidated bonuses pensionable where they receive them outside the period for reckoning pensionable earnings. While you and the member will pay contributions on the bonuses they will not increase the final pensionable earnings unless they fall within the pay period(s) for calculation. For example, the pay period for classic members remains their last three years of service.
There is a danger that making such payments pensionable may leave you open to legal challenge and you should seek advice before submitting a request to Cabinet Office to make a non-consolidated bonus pensionable.
There are no past service cost issues in relation to nuvos or alpha members.
10.1.9 This term defines any part of an employee’s earnings that you do not pay on a fixed basis. It can include such things as non-consolidated bonuses. In classic, classic plus and premium fluctuating allowances can only be made pensionable if they are averaged over the last three years. The reason for this is to prevent the deliberate increase of pension entitlement in the last year of service. You must take in to account the above advice before contacting Cabinet Office, The Pensions Schemes Executive, to make such allowances pensionable.
10.1.10 If you want to make a non-consolidated element of pay pensionable, you must first contact Cabinet Office, The Pension Schemes Executive with a business case giving details of the allowance and the date from which you want it to become pensionable. They will either give you the go ahead or tell you the reasons why they cannot approve your request.
10.1.11 Tell MyCSP of your intentions and agree with them how they will handle the administration and payroll interface implications.
10.1.12 If Cabinet Office, The Pension Schemes Executive agrees to you making the pay element pensionable, you must ask the Government Actuarys’ Department (GAD) to assess the past service costs.
10.1.13 You will have to pay GAD for their services.
10.1.14 You must give GAD the following information:
- Details of the proposed change and the number of members who will benefit
- Whether you plan to make it available to new staff and, if so, how many. If you are not making it available to new staff make sure you are not legally obliged to do this
- Effective date for the pay element to become pensionable. (GAD will calculate the past service costs as at that date. From that date contributions will be payable on the total new pensionable pay.)
- Details of where to send the invoice
10.1.15 You will also need to provide GAD with an Excel spreadsheet on which you will need to include the following information on each member you are applying for.
- NI number
- Date of birth
- Marital status
- Last 3 years salary (shown annually)
- The last 3 years value of the element of pay you want to make pensionable (shown annually)
- Civil Service Pension scheme which the individual is in i.e. classic, classic plus, premium, nuvos or alpha)
- Total reckonable service for classic, classic plus and premium members (including a breakdown of pre and post 1 October 2002 service for classic plus members)
- For nuvos and alpha members with Club transferred in service and/or linked final salary service, the total Club/linked service
- Start date of current period of service if the member earns in excess of £100,000
10.1.16 You will need to ask MyCSP for some of this information. They may charge you for this service.
10.1.17 You do not have to provide any information about members who are in partnership, or members in nuvos and alpha who do not have neither Club transferred in service, linked final salary service, or in alpha, banked service. This is because there are no past service costs to consider in stakeholder-type or career average pension arrangements.
10.1.18 If you are happy with GAD’s assessment, you will then need to contact Cabinet Office, The Pension Schemes Executive confirming that you wish to accept it. You must enclose a copy of GAD’s assessment and details of how you will be paying the past service costs to the Cabinet Office Civil Superannuation.
10.1.19 Once they have received payment for the past service costs they will then write to you to confirm that the allowance is pensionable.
10.1.20 You will need to make sure that your payroll and MyCSP understand the status of the pay element. Your payroll must understand that it has to calculate both ASLCs and employee contributions on the new pensionable element.
10.1.21 Once you have established the past service costs you will not normally have to pay past service costs for new staff working in posts eligible for the non- consolidate pensionable payment as the general turnover of staff should balance any future liabilities. However, if you want to increase significantly the number of staff to whom you want to give the new pensionable pay element, you will have to ask GAD for a further assessment of past service costs.
10.1.22 Once past service costs are agreed you will not require further past service costs assessments if the element of pay is increased as part of the normal annual pay review for all staff.
10.1.23 For new pensionable pay elements, members of classic, classic plus, premium, nuvos and alpha will all pay employee contributions. There may be some historical reason why classic members may not have to contribute on existing pensionable elements of pay (see 10.1.24). However, these are not precedents for new elements.
10.1.24 If a classic member was receiving a pensionable allowance before 2002 and was not paying contributions then they would continue not to pay contributions. However any classic member who started to receive these allowances after 2002 would have to pay contributions. If any new pensionable elements were introduced after October 2002 then all classic members must pay contributions.