The Local Government Pension Scheme (LGPS) is a defined benefit scheme which means that your pension is calculated using formulas which are set out in Government regulations. The formulas used to calculate your pension depend on when you were a member of the scheme.
Prior to 31st March 2014 the scheme was a Final Salary scheme where your pension benefits were calculated based on four different elements
- Length of pensionable service in years and days (1 years full time = 1 years service, whereas 1 years part time working 18.50/37.00 hours = 6 months service)
- Your Full Time Equivalent Pensionable Pay
- Rate of accrual dependent upon when you were a member (1/60th or 1/80th)
- Circumstances under which you left your post (early, late, flexible, ill health)
How is my Final Salary pension calculated?
|Pre 31st March 2008 Service||1st April 2008 to 31st March 2014|
|Pension||Service x FTE Pensionable Pay x 1/80th||Service x FTE Pensionable Pay x 1/60th|
|Lump Sum||Service x FTE Pensionable Pay x 3/80ths||No automatic lump sum (option to convert)|
For service before 31st March 2008 an accrual rate of 1/80th is used
For service between 1st April 2008 and 31st March 2014 an accrual rate of 1/60th is used
The 'accrual rate' is the rate at which you built up pension benefits whilst you were an active member of the pension scheme.
It is expressed as a fraction, the lower the bottom number, the better the pension benefit you will receive for an equivalent amount of pensionable service.
|Pensionable Service||5 years|
|FTE Pensionable Pay||£24,000|
|Accrual rate (service between 01/04/2009 and 31/03/2014)||1/60th|
|Circumstances - retired on 65th birthday (Normal Retirement Age)||No Reductions/Enhancements|
|5 x £24,000 x 1/60th (+/- no reductions) =||£2,000 annual pension|
What counted towards service before 31 March 2014?
- How long you have been a member of the LGPS in years and days
- Service bought by transferring benefits from another scheme (transfer took place was before 1 April 2014)
For every year you work full time before 31st March 2014 you would accumulate 1 years service.
Similarly, if you worked full time between 1st April and 30th April (30 days) you would accumulate 30 days service.
If you worked part-time before 1 April 2014, your membership is reduced accordingly.
If the member worked 18.5 hours per week and the whole time equivalent hours for the job were 37 hours per week, your membership will be reduced by 18.50/37.00 (which is half).
For the whole period 1 April 2008 to 31 March 2014 the pension benefits would be calculated using 3 years rather than 6 years in this scenario.
If a member had a Final Salary Pensionable Pay of £20,000 the following calculations would apply:
|Service x||FTE Pensionable Pay x||Accrual Rate =||Annual Pension|
|6 years (full time) x||£20,000 x||1/60th =||£2,000|
|3 years (part time) x||£20,000 x||1/60th =||£1,000|
Calculation of accurate pensionable pay is essential in the correct payment of benefits to LGPS members when you employment ceases. It shall be used to calculate any service which was accrued up until 31/03/2014.
Usually, it is a member's last twelve months of service that provide the best pay figure for calculating benefits but this is not always the case (please see protections for more details).
What is pensionable pay?
(a) the full time equivalent salary, wages, fees and other payments paid to members
(b) other payments or benefit specified in his contract of employment as being a pensionable emolument.
From 1st April 2014 you will accrue pensionable benefits in a different way, although the scheme will remain a defined benefit scheme and will continue to be worked out using a set formula.
However, from 1 April 2014 pensionable pay is based upon what you pay pensionable contributions on, and shall be your actual pensionable earnings instead of the full time equivalent.
- For each year in the new scheme, you will build up a pension based on the pensionable pay in that year.
- For each scheme year that you are a member, a pension equal to a 1/49th of your pensionable pay will be added to your pension account.
- Inflation increases will be added to ensure that your pension account keeps up with the cost of living.
|What is included in Final Salary Pensionable Pay|
|Yes||Yes - if contractual||No|
|Full time equivalent salary||Performance related pay||Lease car payments|
|Contractual overtime||Overtime (only contractual)||Expenses incurred|
|First aid allowance||Travel expenses||Loss of holidays|
|Acting up pay||Enhancements e.g. nights, sleep ins||Payment in Lieu of notice period|
|Salary Sacrifice||Bonus or Honoraria payments||Award of compensation for equal pay|
An employee's pensionable pay will normally be the pensionable earnings of the final year of service, ending with the day on which employment ceases, alternatively previous years can be used if a member does hold a previous higher year (please see protections for more details).
If a member ends employment on 31/08/2017, the final years' service would be used to calculate the members FTE pensionable pay 01/09/2016 – 31/08/2017
Any salary changes which occurred between these two dates would be taken into consideration to provide an average across the last 12 months. In this example the member had a pay increase from £24,000 to £26,000 on 01/03/2017.
|01/09/2016 - 28/02/2017||£24,000 x 6 months / 12 months =||£12,000|
|01/03/2017 - 31/08/2017||£26,000 x 6 months / 12 months =||£13,000|
The benefits that you accrued before 31st March 2014 will be calculated as final salary scheme benefits. These are calculated using your final salary pensionable pay, the service accrued in the scheme and the accrual rate at the time you were a member.
Following the 1st April 2014 your pension will be calculated using your actual pensionable pay, the updated accrual rate of 1/49th and an element of inflation (CPI on an annual basis).
|Pre 31st March 2008||1st April 2008 to 31st March 2014||1st April 2014 to date|
|Type of scheme||Final Salary||Final Salary||Career Average Revalued Earnings|
|Pension||Service x FTE Pensionable Pay x 1/80th||Service x FTE Pensionable Pay x 1/60th||Actual Pensionable Pay x 1/49th + Inflation per annum (CPI)|
|Lump Sum||3 x Pension||No Automatic Lump Sum (Option to convert pension to Lump Sum)||No Automatic Lump Sum (Option to convert pension to Lump Sum)|
|Normal Pension Age||65||65||The higher of 65 or New State Pension Age|
|Early Retirement Age||55 (previously 60)||55 (previously 60)||55|
Over recent years there have been multiple changes to the local government pension scheme which will directly affect the benefits you have accrued in the scheme. The table above outlines some key differences which occurred when the scheme altered on 1st April 2008 and once again on 1st April 2014.
Whether you were a member of the scheme during one, two or all three tranches, the benefits that you accrued during that specific period will be full protected and will remain as they were during that tranche.
Career Average Revalued Earnings Scheme (CARE)
Following 1st April 2014 the scheme changed to a Career Average Revalued Earnings (CARE) scheme.
This means that as a member you build up a fraction of your 'Career Average Earnings' for each year of membership of the scheme, which are 'Revalued' in line with inflation (Consumer Price Index) on an annual basis.
The accrual rate for the CARE scheme is 1/49th, meaning that a member builds annual pension each financial year at the rate of 1/49th of your annual actual pensionable pay (pay that you pay contributions on).
This accrued annual pension is added to any pension that had previously been accrued since 1st April 2014 and inflated in line with the Consumer Price Index. This amount is then forwarded as the opening balance for the following year, and the process is repeated until you leave the scheme or retire.
|Year||Opening Balance||Annual Actual Pensionable Pay||Accrual rate||Annual CARE pension accrued||CARE pension accrued to date||+ CPI (inflation)||Pension Pot|
- As the CARE scheme was introduced on 1st April 2014 the member does not hold an opening balance.
- In the first year the member had a Pensionable Pay of £19,600 and paid contributions on this amount.
- The accrual rate for the MAIN section of the scheme is 1/49th, therefore to calculate the CARE pay for that single year, we will calculate 1/49th of £19,600. This provides the member with a CARE pay for that single year of £400.00.
- With no previous CARE benefits apparent (brand new scheme), the total CARE pay to date will also equal £400.00.
- Consumer Price Index for this year was confirmed as 1.2%, we will add 1.2% of the CARE pay to date to provide the member with a Pension Pot at the end of 2014/15 of £404.80.
- This Pension Pot is then brought forward to become the Opening Balance of the following year.
- The above steps will repeat until the member either retires, leaves or opts out of the pension scheme. As the above member retired on 31st March 2017, they will be entitled to a standard annual pension of £1,400.