Section 10 - Pensionable earnings

Introduction

10.1.1 This section describes what elements of earnings are pensionable and also tells you what you need to consider if you are thinking about: 

  • making elements of earnings pensionable; 
  • consolidating elements of earnings into basic pay.

Roles and responsibilities

10.1.2 In all cases, you must get authorisation from the Scheme Manager, Cabinet Office before you implement any changes.

10.1.3 Please contact: cspsemployerenquiries@cabinetoffice.gov.uk.

10.1.4 For queries about the payroll interface with the Scheme Administrator’s (MyCSP) pension administration system (Compendia), contact: interfaceteam@mycsp.co.uk

Please Note: Under the Stakeholder Charter, employers are required to comply with scheme rules and guidance, including collecting and paying across employer and member contributions correctly calculated by reference to pensionable earnings, transferring across accurate pensionable earnings data to the Scheme Administrator, and completing and sending to the Scheme Manager, Cabinet Office the monthly contributions form.  The Scheme Manager, Cabinet Office own the scheme and are responsible for deciding what elements of pay are pensionable.  The Scheme Manager, Cabinet Office are also responsible for maintaining a robust system of control and for checking compliance with scheme rules and procedural requirements.

What is pensionable?

10.1.5 Pensionable earnings are the total of basic salary (or wages) and other pensionable emoluments. An emolument is any form of remuneration paid to an employee in addition to basic salary. A general description of what is (and is not) pensionable is contained in Appendix 1 to the 1972 Section of the PCSPS rules. Essentially, most payments that are provided on a permanent basis are pensionable (unless they are provided on an explicitly non-pensionable basis), whereas non-permanent payments, such as overtime, are generally non-pensionable. A more detailed description of what is pensionable is set out in Annex 10B.

Please note: Any change made to the pensionability of earnings paid to employees must be approved by the Scheme Manager, Cabinet Office.

The implications of making changes to pensionable earnings

10.1.6 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 classicclassic pluspremium 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.

10.1.7 Basic pay normally increases each year. The Accruing Superannuation Liability Charge (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 the Scheme Manager, Cabinet Office for approval of any such allowances.

10.1.8 ASLCs assume average pay progression. They do not take account of step changes in pensionable earnings. A step change could occur if you make an allowance or non-consolidated payment pensionable. 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.

10.1.9 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.

10.1.10 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.

Matters to consider when thinking about making an allowance or non-consolidated pay pensionable

10.1.11 An allowance is a payment that is normally paid on a permanent basis, typically in recognition of specific skills/qualifications or additional duties/responsibilities.

10.1.12 Fluctuating allowances or non-consolidated payments are terms that define any part of an employee’s earnings that you do not pay on a fixed basis and are not included in basic pay in future years. It can include such things as non-consolidated bonuses. They are usually one-off performance related payments that have to be ‘re-earned’ every year. Normally they are non-pensionable. 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 into account the above advice before contacting the Scheme Manager, Cabinet Office to make such allowances pensionable.

10.1.13 The Minister for the Civil Service has discretion to treat allowances and/or non-consolidated pay as pensionable. In practice, the Scheme Manager, Cabinet Office carries out this work on the Minister’s behalf. If you are considering making an allowance or an element of non-consolidated pay pensionable, you must first get authorisation from the Scheme Manager, Cabinet Office (see procedure outlined below).

Please note: The Scheme Manager, Cabinet Office will not normally agree to an allowance or non-consolidated payment being made pensionable unless it will be pensionable for everyone who receives it and there is no scope for the individual to manipulate the circumstances in which the payment is received.

10.1.14 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 reckonable service.

10.1.15 There is a danger that making such payments pensionable may have issues for equal treatment and leave you open to legal challenge. You should therefore seek your own legal advice before submitting a request to the Scheme Manager, Cabinet Office to make a non-consolidated bonus pensionable.

10.1.16 There are no past service cost issues in relation to CARE benefits for nuvos or alpha members.  However, there will be past service costs in respect of any ‘linked’ final salary benefits in nuvos, or any ‘banked’ service in the PCSPS for transition members of alpha.

10.1.17 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- consolidated 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 the Government Actuary’s Department (GAD) for a further assessment of past service costs.

10.1.18 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.

10.1.19 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.

Procedure for applying to make an allowance or non-consolidated pay pensionable

10.1.20 If you want to make an allowance or a non-consolidated element of pay pensionable, you must first contact the Scheme Manager, Cabinet Office (cspsemployerenquiries@cabinetoffice.gov.uk) with a business case (see standard template at Annex 10D) 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.

10.1.21 Tell the Scheme Administrator (interfaceteam@mycsp.co.uk) of your intentions and agree with them how they will handle the administration and payroll interface implications.

10.1.22 If the Scheme Manager, Cabinet Office agrees to you making the pay element pensionable, GAD must then be commissioned to assess the past service costs.  You can commission GAD direct for this service or you can request that the Scheme Manager, Cabinet Office commission this work from GAD on your behalf.

10.1.23 You will have to pay GAD for their services.  GAD’s fees for this work can be significant.  To minimise the costs to employers, GAD will initially calculate a ‘broad brush’ assessment of the past service costs.  If you consider the cost not to be prohibitive, you need to confirm to GAD that you wish them to proceed with the full past service costs assessment.

10.1.24 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. 

10.1.25 You will also need to provide GAD with an Excel spreadsheet (using the standard template at Annex 10E) on which you will need to include the following information on each member you are applying for: 

  • member number; 
  • gender; 
  • date of birth; 
  • date joined scheme; 
  • current member section (classic, premium, classic plus, nuvos or alpha – see Note 1 below); 
  • member section prior to 1 April 2015 (classic, premium, classic plus, nuvos - only required for members in service before 1 April 2015); 
  • linked service (nuvos members) indicator [Y/N]; 
  • Full-time equivalent (FTE) pensionable pay at the extract date (see Note 2 below); 
  • Actual pensionable pay at the extract date (see Note 2 below); 
  • Increase to (FTE) pensionable pay (due to making a new element of pay pensionable or due to proposed increase to current pensionable pay); 
  • total 80ths reckonable service for member’s benefits (include all elements in Note 3 below); 
  • total 60ths reckonable service for member’s benefits (include all elements in Note 2 below); 
  • earnings cap indicator [Y/N]. 

Note 1: You do not have to provide any information about members who are in partnership, or members in nuvos and/or alpha who do not have either 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 or career average pension arrangements. 

Note 2: Pay amounts should be the annualised amounts over the extract year, i.e. assuming members are in employment for the whole year. Full-time equivalent pay means the annualised pay the member would have received for full-time hours. Actual pay means the annualised pay for working the member’s own part-time or full-time hours.  

Note 3: This should be the total reckonable service. The reckonable service recorded should be reduced for any pension that is already in payment under partial retirement provisions.  Service should be specified in years, with part-years counting proportionately.  It will include:

a. service credited on receipt of transfer value (including bulk transfers, Club transfers in where relevant and nuvos linked service);

b. added years of service already bought by lump sum, or where the regular contributions have ceased;

c. the proportional credit purchased as at the extract date for added years contracts still in force.  For example, if a member chooses to purchase 6 years of added service between 31 March 1998 and 31 March 2018 (over a period of 20 years) then the added years of service included in the data for an extract date of 31 March 2016 would be 5.4 years (i.e. 18/20 x 6);

d. any periods of service relating to previous employment, where the service is still reckonable for a benefit in the scheme and linked to the member’s final salary;

e. any periods of part-time service needs to be reflected, e.g. reckonable service for part-time service pro-rata based on actual hours worked / standard hours;

classic members will have reckonable service in the 80ths data field.

premium members and linked service nuvos members will have service in the 60ths data field

classic plus members will have reckonable service in both the 80ths data field and the 60ths data field.

10.1.26 You will need to ask the Scheme Administrator for some of this information. They may charge you for this service. Any request for information from the Scheme Administrator should be sent to your Employer Relationship Manager (ERM).

10.1.27 You do not have to provide any information about members who are in partnership, or members in nuvos or alpha who do not have either Club transferred in service, linked final salary service, or in alpha, banked PCSPS service. This is because there are no past service costs to consider in stakeholder-type or career average pension arrangements.

10.1.28 If you are happy with GAD’s assessment, you will then need to contact the Scheme Manager, Cabinet Office (through the CSPS Employer Enquiries mailbox - cspsemployerenquiries@cabinetoffice.gov.uk) 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 Vote.

10.1.29 Once the Scheme Manager, Cabinet Office have received payment for the past service costs they will then write to you to confirm that the allowance is pensionable.

10.1.30 You will need to make sure that your payroll and the Scheme Administrator 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.

10.1.31 There is a flowchart (at Annex 10C) setting out the process for making an allowance or non-consolidated payment pensionable.

Annexes