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What are 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 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.

10.1.7 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.

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