Making an Allowance Pensionable

Introduction

This page describes what elements of earnings are pensionable and also tells employers what they need to consider if they are thinking about:

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

Roles and Responsibilities

In all cases, the employer must get authorisation from the Scheme Manager before they implement any changes.

Please contact: pensionspolicycsp@finance-ni.gov.uk

For queries about the payroll interface with the Scheme Administrator’s CSP(NI)contact: cspinterfacequeries@finance-ni.gov.uk

Please Note: Under the Participation Agreement, 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, the monthly contributions form. The Scheme Manager is responsible for deciding what elements of pay are pensionable. The Scheme Manager is also responsible for maintaining a robust system of control and for checking compliance with scheme rules and procedural requirements.

What is Pensionable?

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(NI) 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.

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

The Implications Of Making Changes To Pensionable Earnings

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.

Basic pay normally increases each year. The Accruing Superannuation Liability Charge (ASLC) mechanism ensures that employers 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 leave employers open to legal action under discrimination laws and legal advice must be sought before employers contact the Scheme Manager for approval of any such allowances.

ASLCs assume average pay progression. They do not take account of step changes in pensionable earnings. A step change could occur if an employer makes 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.

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, employers will have to pay them.

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, employers 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

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

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. Employers must take into account the above advice before contacting the Scheme Manager to make such allowances pensionable.

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

Please note: The Scheme Manager 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.

Employers 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 employers 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.

There is a danger that making such payments pensionable may have issues for equal treatment and leave employers open to legal challenge. Employers should therefore seek their own legal advice before submitting a request to the Scheme Manager to make a non-consolidated bonus pensionable.

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(NI) for transition members of alpha.

Once employers have established the past service costs they 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 employers want to increase significantly the number of staff to whom they want to give the new pensionable pay element, they will have to ask the Government Actuary’s Department (GAD) for a further assessment of past service costs.

Once past service costs are agreed employers 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.

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. However, these are not precedents for new elements.

Procedure For Applying To Make An Allowance Or Non-Consolidated Pay Pensionable

If employers want to make an allowance or a non-consolidated element of pay pensionable, they must present a business case to the Scheme Manager, giving details of the allowance and the date from which they want it to become pensionable.

The Scheme Manager will either give employers the go ahead or tell employers the reasons why they cannot approve their request.

Please complete the application form below:

Application for Making a Submission to the Scheme Manager, CSP(NI), About Introducing a New Pensionable Allowance / Non-Consolidated Payment

Send your Completed Application Form to Scheme Manager at: pensionspolicycsp@finance-ni.gov.uk

Employers must tell the Scheme Manager of their intentions and agree with the Scheme Manager how they will handle the administration and payroll interface implications.

If the Scheme Manager agrees to employers making the pay element pensionable, GAD must then be commissioned to assess the past service costs. Employers can commission GAD direct for this service or they can request that the Scheme Manager commission this work from GAD on the employer’s behalf.

Employers 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 an employer considers the cost not to be prohibitive, they need to confirm to GAD that they wish them to proceed with the full past service costs assessment.

Employers Must Give GAD The Following Information:

• details of the proposed change and the number of members who will benefit;
• whether employers plan to make it available to new staff and, if so, how many – if employers are not making it available to new staff they need to make sure they 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.

Employers will also need to provide GAD with a Template for Providing Information needed to calculate past service costs on which employers will need to include the following information on each member they 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: Employers 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.

Employers will need to ask the Scheme Manager for some of this information. The Scheme Manager may charge employers for this service. Any request for information from the Scheme Manager should be sent to pensionspolicycsp@finance-ni.gov.uk

Employers 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(NI) service. This is because there are no past service costs to consider in stakeholder-type or career average pension arrangements.

If employers are happy with GAD’s assessment, they will then need to contact the Scheme Manager at pensionspolicycsp@finance-ni.gov.uk confirming that they wish to accept it. Employers must enclose a copy of GAD’s assessment and details of how they will be paying the past service costs to the Scheme Manager.

Once the Scheme Manager has received payment for the past service costs they will then write to the employer to confirm that the allowance is pensionable.

Employers will need to make sure that their payroll and the Scheme Manager understand the status of the pay element. Employer’s payroll must understand that it has to calculate both ASLCs and employee contributions on the new pensionable element.

Please see flowchart setting out the process for making an allowance or non-consolidated payment pensionable.

FAQs

What are the pensions implications if we were to consolidate an allowance, which is currently non-pensionable into basic pay or get rid of overtime and pay everyone a higher "all hours worked" salary?

Any increase to pensionable pay will increase pension benefits earned prior to the date of the change as well as those to be earned in the future. Employers must get approval from the Scheme Manager about changes in the pensionable status of any aspect of pay. Where the effect of a change is to increase final pensionable earnings, employers will need to assess and usually pay for the past service cost implications.

We are thinking about making non-consolidated bonuses pensionable. What issues should we be considering and are there any alternatives?

Such payments can only be pensionable following the formal exercise of discretion under the Civil Service Pension NI rules by the Scheme Manager. There may also be a past service cost. Employers must therefore get approval from the Scheme Manager in all cases. Administration and employee understanding are complicated by HM Revenue and Custom's imposed need for averaging.

We are moving to a later pay settlement date and would like to make a small one-off payment to compensate staff. Can this be pensionable?

Employers must consult the Scheme Manager but it would normally agree to the payment being pensionable without the complication of it being treated as a "fluctuating emolument".

We would like to make a ONE-OFF payment to staff and make it pensionable only for staff retiring in the next year. Can we do this?

The normal employer (ASLC) and employee contributions are not designed to recover the costs of one-off increases in pensionable earnings made immediately prior to retirement. Where modest increases are made pensionable for all staff, there is not a problem as this is consistent with the underpinning assumption that pay increases are treated (for pension purposes) in the same way for all staff.

If the employer wishes to give a pensionable increase only to those about to retire, then the Scheme Actuary will need to assess the full past service cost for the staff involved, which you will have to pay. The cost will vary depending on the amount of past service of each employee affected but it would probably be at least 4 times the total amount of the increase in pay.

Please Note: If employers do not pay ASLCs that are due, the cost will ultimately fall on all employers participating in the CSPS. Although the costs in any individual case may appear to be modest in relation to the size of the scheme, the principles underpinning the ASLC mechanism need to be upheld if it is to remain fair to all participating employers.