Under pre-existing public service pension schemes, an individual’s pension benefits are calculated by reference to their final pensionable remuneration and total reckonable service.
Final pensionable remuneration includes both pensionable salary and pensionable emoluments, subject to certain criteria. Pensionable emoluments include pensionable allowances, and the value of some benefits provided as part of an individual’s conditions of employment (such as accommodation and uniforms).
In general, a pensionable allowance is one which has been deemed to be an allowance in the nature of pay, and/or an allowance that was deemed to be pensionable at the time of its award, having received prior written approval from the appropriate authority specifying this. Payments such as those in respect of overtime, travel and subsistence etc. are generally not pensionable.
The reckoning of allowances for pension purposes is subject to the payment of appropriate contributions.
Whether a pensionable allowance falls to be included in an individual’s final pensionable remuneration for the purposes of calculating their pension benefits will depend on whether the allowance is ‘fixed’ or variable’ in nature. The method of calculating the value of allowances to include in an individual’s final pensionable remuneration also differs depending on whether an allowance is fixed or variable in nature.
Fixed pensionable allowances
A fixed allowance is generally one which is paid at a set rate and does not vary, for example based on an individual’s working pattern. A fixed allowance must generally be held at retirement in order to be considered for inclusion in an individual’s final pensionable remuneration.
The value of the fixed allowance to be included in an individual’s final pensionable remuneration will be based on the average annual amount of that allowance paid to the employee during the 3 years of reckonable service immediately preceding their last day of service.
Variable pensionable allowances
A variable allowance may be considered for inclusion in an individual’s final pensionable remuneration where it has been held in the 10-year period preceding the individual’s last day of service.
The value of variable allowances to be included in an individual’s final pensionable remuneration will be based on an average of the variable pensionable allowances received in the best 3 consecutive years in the 10 years preceding retirement, uprated to the date of retirement. The most favourable 3-year period, resulting in the highest allowance amount, will be included in final pensionable remuneration. This method of calculation is known as the ‘best 3-in-10’ method and is further explained in Circular 10/2008.
Where an individual is promoted 3 or more years before retirement, allowances held in their former grade do not fall to be included in the ‘best 3-in-10’ calculation. Where an individual is promoted in their final 3 years of service and immediately prior to promotion they had been in receipt of a pensionable allowance, the calculation of their pension benefits will be based on an annual average of allowances received during their final 3 years of service.
Allowances which recoup out-of-pocket expenses such as mileage allowances and subsistence allowances are not reckonable for pension purposes. Allowances for the performance of duties which do not form an integral part of an individual’s own post, such as occasional work performed for another department or office, are not pensionable.
Overtime payments are not pensionable. An exception to this may apply where extra attendance is compulsory, regular and rostered, forms an inherent part of the conditions of service for the post, and where extra attendance is considered to be the most effective and economical means of carrying out the work. Payments for such additional attendance must also have been approved as pensionable, on the basis of meeting those conditions, in order to be reckonable for pension purposes.
Allowances which are not in the nature of pay and/or which have not received approval in accordance with the relevant process for such (either centrally or locally, as appropriate) are not reckonable for pension purposes.
In addition to the various criteria set out above, in order for an allowance to be reckonable for pension purposes and included in final pensionable remuneration, all appropriate pension contributions must be paid. This includes, for example, main scheme pension contributions, Spouses’ and Children’s Scheme contributions, or purchase of notional service contributions.
Where such contributions have not been paid, and an allowance falls to be included in an individual’s final pensionable remuneration, a deduction will be made from the individual’s retirement lump sum/preserved lump sum/death gratuity, as appropriate, in respect of the contributions owed.
As both fixed and variable pensionable allowances must be held in a particular time frame relative to retirement, it is generally not possible to know whether an allowance will be included in an individual’s final pensionable remuneration, and the value of that allowance, until an individual is actually retiring. This means that where contributions are owed in order to reckon pensionable allowances, the amount due usually cannot be confirmed until an individual is actually retiring.
Allowances and main scheme pension contributions
Main scheme employee pension contributions are a requirement under many pre-existing public service pension schemes. Where, for whatever reason, a pensionable allowance falls to be included in final pensionable remuneration and a main scheme contribution is due but has not already been paid, this may fall to be paid at retirement. An individual’s contributions liability will be assessed in accordance with the rules of the pension scheme relevant to them.
Allowances and Spouses’ and Children’s Scheme contributions
An employee contribution is required in respect of membership of a Spouses’ and Children’s Pension Scheme associated with an employee’s main pension scheme or where a contribution in respect of survivor’s benefits is a requirement under an employee’s main pension scheme.
Where, for whatever reason, a pensionable allowance falls to be included in final pensionable remuneration and a contribution in respect of Spouses’ and Children’s Scheme membership / survivor benefits is due but has not already been paid, this will fall to be paid at retirement. An individual’s contributions liability will be assessed in accordance with the rules of the pension scheme relevant to them.
Allowances and purchase of notional service contributions
Under the purchase of notional service scheme operating in the civil service and certain other public service pension schemes, purchase contributions are levied on salary only. Where a non-salary element (such as a pensionable allowance) falls to be included in a member’s final pensionable remuneration, an additional purchase contribution will be due at retirement to cover the cost of the notional service arising from that non-salary element. Further information on this is set out in Appendix 1, paragraph 3(5) of DPS Letter to Personnel Officers 27 April 1979 and paragraph 4.3 of Department of Finance Letter to Personnel Officers of 12 February 1990.
Due to the criteria and averaging calculations which apply in relation to reckoning of allowances for pension purposes (as set out above), whether an allowance will fall to be included in an individual’s final pensionable remuneration and the value of those allowance(s) cannot be determined until an individual is actually retiring. Contributions in respect of purchase of notional service are therefore not levied against allowances during service, as those allowances may not form part of final pensionable remuneration. For example, if an allowance falls outside the relevant timeframe or the individual has been promoted and the allowance relates to a former grade, it does not form part of final pensionable remuneration and no additional benefit arises in respect of the purchased service - a purchase contribution would therefore not fall due.
- Circular 38/2007: Allowances for the performance of the duties of a higher grade
- Circular 10/2008: Public Service Pension Reform: Revised method of reckoning variable pensionable allowances for pension purposes
