The Benefit Cap, also known as the 40-year rule, is a limit on the amount of pensionable service an individual may accrue across all pre-existing public service pension schemes (non-Single Scheme terms) to a maximum of forty years or equivalent. It was introduced under section 52(6) of the Public Service Pensions (Single Scheme and other Provisions) Act 2012 (‘the 2012 Act’).
Under most pre-existing public service pension schemes, pension accrual is limited to a maximum of 40 years’ reckonable service (certain fast accrual pension schemes account for service differently).
The 2012 Act extended that limit so that a public servant who holds an entitlement to receive pension benefits from one or more than one pre-existing public service pension scheme would have their total pensionable service across all such schemes limited to a maximum of 40 years or equivalent when calculating the benefits payable under those schemes.
Section 52(7) of the 2012 Act included a protection for any public servant who had accrued more than the equivalent of 40 years’ pensionable service at the date of passing of the 2012 Act. This means that any person who had accrued more than 40 years’ service or equivalent up to 27 July 2012 across pre-existing public service pension schemes, may continue to have their pension benefits calculated by reference to their pensionable service accrued up to that date.
Circular 13/2020 provided guidance on the practical application of the Benefit Cap, introducing a new method of calculation which had regard to both an individual’s total reckonable service and their best final pensionable remuneration. This method allows for the calculation of ‘the equivalent of 40 years’ service’ in terms of a financial limit on the total pension benefits payable to an individual across all pre-existing public service pension schemes. It requires the relevant pension administrator to establish overall financial limits by calculating a maximum allowable pension and lump sum using:
- the total number of years’ pensionable service allowable under the legislation, and
- the highest, or ‘best’ rate of final pensionable remuneration uprated, as appropriate, to a current value, from across the different schemes and pension/lump sum calculations applying to the member.
The Benefit Cap to apply to a member’s pension benefits may then be established by comparing the total unrestricted pension benefits accrued under all pre-existing pension schemes of which they were a member, with the total allowable pension and total allowable lump sum financial limits established in line with the method set out in Circular 13/2020.
Section 51 of the 2012 Act places a legal obligation on individuals taking up employment in the public service to declare any entitlement to pension benefits accrued under a public service pension scheme, whether already in payment or preserved. Public service bodies should be proactive in ensuring that such statutory declarations are obtained from individuals on commencing public service employment.
Such declarations are important not only to ensure proper application of the Benefit Cap, but to ensure that pension abatement is applied where required, and to establish an individual’s prior public service employment history in the context of determining the appropriate pension scheme membership to apply in respect of their new public service employment.
A template Section 51 ‘Applicant Declaration Form’, which may be used for all persons taking up public service employment, is available on the Single Scheme website at this link.
Calculation tools for administrators and advice on their use are available by request by emailing the Pensions Policy Unit.
- Public Service Pensions (Single Scheme and Other Provisions) Act 2012
- Circular 13/2020: Guidance on the application of the Pensions Benefit Cap under section 52 (6) and (7) of the Public Service Pensions (Single Scheme and Other Provisions) Act 2012
- Circular 13/2020: Explanatory Examples
