Understanding pay - training

Please note: This guidance only refers to the situation in England and Wales. 

Overall, there's 89 'funds', each with their own idiosyncraises including procedures, forms, timescales and views.

 

Pensionable pay  Back to top

Pay for pension purposes is 'all the pay... declared for tax' except: 

  • non-contractual overtime
     
  • travelling / subsistence
     
  • bought-out holiday entitlement
     
  • payment in lieu of notice
     
  • 'please don’t leave' payments
     
  • lease cars or cash equivalent
     
  • equal pay compensation
     
  • certain returning officer fees
     
  • Environment Agency or LSC 'contribution' supplements
     
  • new towns termination payments
     
  • school achievement awards

Pensionable pay redefined in 2014

  • Main differences
    • non-contractual overtime now pensionable
       
    • payment in consideration of loss of future pensionable payments or benefits is now not pensionable
       
    • any pay to a member on RFSL is not pensionable
       
  • Salary sacrifice?
    • specify in contract of employment as a pensionable emolument
       
    • see LGPC Circular 244 for details
       
  • Autumn statement 2016
     
  • From 2017, 'perk' is being taken away
     
  • Sold leave
    • Non-pensionable (as it is an exclusion)
       
  • 'Forced leave'
    • effectively unpaid leave not salary sacrifice, therefore dealt with under absence rules
       
    • but could be a forced cut in pay and give Ben Reg 10 entitlement
       
    • and there’s always 'net pay deductions'

The dangers of distorting the 'curve'

  • Scheme designed to be fair
     
  • Fair to the employee, fair to the employer
     
  • But there have always been 'winners and losers' when it comes to final salary schemes
    • Part of the reason employee contribution banding was introduced

  • Volatility = unfairness

  • Danger
    • Distort the curve and pick up the bill!

 

Care scheme  Back to top

A career average pension:

  • a final salary 60ths scheme would give 1/60 x membership x 'pay at the end'
      
  • a Care 60ths scheme would give 1/60 x membership x average pay 'throughout'

Commenced May 1988, SPA July 2001.

YearEarningsPercentage revaluationRevalued earnings
1988/89 12005 97 £23,649.85
1989/90 11880 77.8 £21,122.64
1990/91 14366 65.7 £23,804.46
1991/92 16688 50.5 £25,115.44
1992/93 17603 41.3 £24,873.04
1993/94 18235 34.6 £24,544.31
1994/95 18657 30.6 £24,366.04
1995/96 19690 25.1 £24,632.19
1996/97 20078 21.7 £24,434.93

Pension accounts - a different concept

  • As well as active accounts, you can have
    • deferred accounts
       
    • pensioner accounts
       
    • survivor's accounts
       
  • Active a/c revaluated by Treasury Order
     
  • Others by PI (Review) Orders, as now
     
  • 'Tricky' issue in year of leaving
    • that’s the administering authority’s job

Cumulative pensionable pay

  • 'Actual' pensionable pay and/or 'assumed' pensionable pay
    • in either section of the scheme, in the scheme year

Issues with arrears of pay

  • What to do with arrears of pay?
    • 2008 – pay due for a period, not pay received in a period
       
    • otherwise could distort final pay
       
    • not relevant consideration in a Care scheme
       
  • 2014 - pay received in a period, not pay due for a period
    • except when calculating final pay for pre-14 membership!
       
  • What about arrears paid April 14+ in respect of March 14- ?
    • don’t add into CARE cumulatives!
       
    • take pension on ‘08 pensionable pay definition at ‘08 rate
       
    • but the employer contribution rate can be the rate at time of payment

Separate contracts?

  • Separate records must be held for 'true' separate jobs at administering authority level
     
  • Separate records must be held for these separate jobs at scheme employer level too
    • As for automatic-enrolment requirements
       
  • Example of 'single-employment relationship'
    • 2 concurrent employments where A would be terminated if B stopped
       
    • 2 sequential employments - say a promotion
       
  • On the contrary, SERs wouldn’t exist where:
    • 2 concurrent employments where A would NOT be terminated if B stopped
       
    • 2 sequential employments but with a break in service
       
  • Great care needed with folk paid through timesheet claim!
     
  • And crucially, which data belongs to which record?

Assumed pensionable pay

  • Replaces actual pay if
    • on reduced pay or no pay due to sickness
       
    • reduced or nil pay on relevant child-related leave
       
    • Reserved Forces Service leave
       
  • Simply drop assumed PP into cumulatives rather than actual PP (if any)
     
  • if actual is higher - actual drops in
    • e.g. possible on a KIT day

Assumed pensionable pay - the calculation

  • Calculated at an annual rate
    • Applied during the relevant period as a proportion
       
  • For non-monthly paid staff:
    • Calculate average of actual PP in last 12 weeks
       
    • After removing 'lump sums'
       
    • Gross up to a year (e.g. 52.143/12 or 365/84)
       
    • If less than 12 weeks exist, use whatever available
       
  • For monthly paid staff: 
    • Same principle but 3 months rather than 12 weeks
       
  • This 'simplicity' may lose a little 'accuracy' but is easily programmable

Example

Monthly paid employee goes onto half-pay sick during month 4:

  • actual PP in month 1 = £1400
     
  • actual PP in month 2 = £2500 (including £1k bonus, £100 O/T)
     
  • actual PP in month 3 = £1400
     
  • assumed PP is: ( £1400 + £1500 + £1400) / 3 * 12 ) = £17200
     
  • the £1000 is excluded for good reason!
     
  • however, if you consider there’s a reasonable expectation that any 'lump sum' paid in the last 12 months would have been paid during the period when APP applies
    • You have discretion to include it
       
  • don’t forget the APP and separate employments rule too

Adjusting APP

  • One circumstance where APP is later increased
    • Where APP continues past a second 31 March e.g. long term sickness
       
  • Increased on account of inflation using treasury order
     
  • Will be increased in future years too if APP still applies

50/50 and APP

  • Two triggers for moving back to 'main'
    • going onto no pay sick
       
    • going on to no pay OML/OAL/OPL
       
  • Moved to main section on first day of next pay period
    • assuming they’re still on no pay then of course
       
  • Say someone (monthly paid) drops from half pay sick to no pay sick in the middle of August
     
  • They will move into the main scheme from 1 September
     
  • APP as a value will not change but
    • in August APP/12 drops into 50/50 CPP
       
    • in September, APP/12 drops into main CPP

 

Final pay calculations  Back to top

Benefit regulation 8-11

  • Total pay on which contributions were paid, or were deemed to be paid, in the last year of employment
    • concurrents can’t select pay from another job
    • can’t use unaggregated membership
       
  • Best of the last 3 years
    • either of 2 preceding “anniversary” years
       
  • Absences
    • OML/OPL/OAL + paid AML/SPL/AAL – use w/t equivalent pay
       
    • unpaid AML/SPL/AAL – use w/t equivalent pay only if APCs have been paid to cover the whole of the period
       
  • The differential on APCs is crucial!
     
  • Illness or injury
    • reduction/loss of pay is disregarded
       
  • Leave, gaps or part-years
    • 365/n
       
  • Fees – 'average of' not 'best of'
     
  • Certificates of protection
     
  • Benefit regulation 10

Whole timers

  • The regulations say a whole-timer is:
    • an employee whose contract of employment provides
      • that he is such an employee for the scheme
         
        or
         
      • that his contractual hours are not less than the number of contractual hours for a person employed in that employment on a whole-time basis

Part timers

  • Before 1/4/14 membership accrued as a fraction
    • the numerator of that fraction is the number of contractual hours during the part-time service and its denominator is the number of contractual hours of that employment if it were on a whole-time basis
       
  • Final pay
    • in the case of part-time employment, the final pay is the pay which would have been paid for a single comparable whole-time employment

Hours or pay proportionality

  • In the Care world it matters not one jot
     
  • But for anyone with pre-1/4/14 rights, it does
     
  • Member A vs Member B and Member C
     
  • And don’t forget Member D!
     
  • Difficult to grasp now we’re operating Care

Member A

  • 100% whole-time
     
  • Gets £10,000 plus £2000
     
  • Work for 10 years
     
  • Pays 5.5%: £120,000 x 5.5% = £6,600
     
  • Well, it’s 10/60 x £12,000 = £2,000 p.a

Member B and C 

  • Both 50% of whole-time
     
  • Member B gets £5,000 basic only
     
  • Member C gets £5,000 plus £2000
     
  • Work for 10 years
     
  • B pays 5.5%: £50,000 x 5.5% = £2,750
     
  • C pays 5.5%: £70,000 x 5.5% = £3,850

Let’s look at the regs

  • Membership accrues as a fraction - “The numerator of that fraction is the number of contractual hours during the part-time service and its denominator is the number of contractual hours of that employment if it were on a whole-time basis”.

  • Final pay - “In the case of part-time employment, the final pay is the pay which would have been paid for a single comparable whole-time employment”

 

Care takes care of it going forward  Back to top

  • Member D’s last year would be in the Care world so all OK
     
  • But for anyone who had the proportionality issue prior to 1/4/14
    • final pay is key
       
  • And most people would argue it is better to have the odd underpayment rather than the odd overpayment
     
  • Your Fund’s view expressed in their final pay notes:
    • “the final pay provided for part-time employees should be on a whole-time equivalent figure i.e. the pay that they would have received had they been employed on a whole-time, whole-year basis. This principle extends to any allowances they may receive. In general if any element of pensionable pay would have been paid at a higher amount in respect of more hours had the employee been whole-time then those amounts should be used for the calculation”

 

Term-time members  Back to top

  • A T/T working full-time for 44 weeks of the year and earning £20,000 could have a final pay of:
    • £20,000 x 52/44 = £23,636.36
    • With membership accruing at 44/52nds
       
  • Or they could have this approach as an alternative:
    • membership = 100% of whole time
    • pay = £20,000
       
  • Each administering authority goes its own way!
    • please note: 'Equaters' can’t agree on 52 / 52.143 / 52.167 etc.
    • Staffordshire are an 'equater' - whole-time, whole-year basis
       
  • Although the membership angle has gone with Care
    • the final pay angle has not

 

Variable-time members (fees)  Back to top

  • Average over final 3 years
     
  • Employer has discretion to substitute with average of '3 in 10' (years ending 31 March)
     
  • Done to 'iron out' fluctuations in an attempt to ensure fairness

 

Certificates of protection (with respect to drops or restrictions pre-1 April 2008)  Back to top

  • Proverbial 'pain' to administer
     
  • 'Best of the last 13 years'
     
  • Actually means the greater of:
    • best of the last 5 years
       
      and
       
    • best average of 3 consecutive years in the last 13 years

 

Benefit regulation ten  Back to top

  • Reduction in pay during continuous period of employment
    • but not as a result of ceasing a temporary post
       
    • or flexible retirement
       
  • Because:
    • chooses to carry on in lower grade or less responsibility
       
    • equal pay achievement with other employees
       
    • job evaluation
       
    • loss of or reduction in pensionable emoluments
       
    • rate of increase in future pay restricted
       
  • Occurs in last 10 years and post 31/3/08
     
  • Can choose best average consecutive 3 years in the last 13 ending on a 31 March

A few points worthy of note:

  • Election should be made by the member at least 1 month before leaving
    • and in writing to the administering authority
       
  • The pay figure the member can select doesn’t have to be the highest
     
  • TUPE protection to Reg 10(1)(a)
    • but ought to apply to (b) to (e) also
       
  • Many Funds act pragmatically or sensibly
    • Election by date or member selecting figure or TUPE rules

 

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