As a Career Averaged Revalued Earnings (CARE) pension scheme the pensionable pay received by a scheme member is crucial in determining the level of pension benefits that the member will receive. In addition, a member who contributed to the Scheme before 1 April 2014 will have their benefits built up to 31 March 2014 based on their final pay when they come to leave their pensionable employment or retire from the Scheme.

Whilst a scheme member's final pay will normally be the pensionable pay received during the last year of employment this is not always the case and in such instances, there are various options available to the scheme member as to how their final pay is calculated for the purposes of determining their pension benefits.

It is important to first refer to the scheme regulations with regard to the meaning of both pensionable and final pay.

The Regulations

The Local Government Pension Scheme Regulations 2013 sets out the meaning of pensionable pay:

Regulation 20 - Meaning of pensionable pay

1. An employee's pensionable pay is the total of:
   a) all the salary, wages, fees and other payments paid to the employee, and
   b) any benefit specified in the employee's contract of employment as being a pensionable emolument.
    
2. But an employee's pensionable pay does not include:
   a) any sum which has not had income tax liability determined on it;
   b) any travelling, subsistence or other allowance paid in respect of expenses incurred in relation to the employment;
   c) any payment in consideration of loss of holidays;
   d) any payment in lieu of notice to terminate a contract of employment;
   e) any payment as an inducement not to terminate employment before the payment is made;
   f) any amount treated as the money value to the employee of a provision of a motor vehicle or any amount paid in lieu of such provision;
   g) any payment in consideration of loss of future pensionable payments or benefits;
   h) any award of compensation (excluding any sum representing arrears of pay) for the purpose of achieving equal pay in relation to other employees;
   i) any payment made by the Scheme employer to a member on reserve forces service leave;
   j) returning officer, or acting returning officer fees other than fees paid in respect of:
   (i) local government elections,
   (ii) elections for the National Assembly for Wales,
   (iii) Parliamentary elections, or
   (iv) European Parliamentary elections.

As far as calculating the final pay linked to benefits built up before 1 April 2014 the conditions as set out in the Local Government Pension Scheme Regulations 2008 still apply as follows:

Regulation 8 - Final pay: general

1. Subject to regulations 9 to 11, a member's final pay for an employment is his pensionable pay for as much of the final pay period as he is entitled to count as active membership in relation to that employment.
2. A member's final pay period is the year ending with the day on which he stops being an active member or, if that would produce a higher figure, either of the two immediately preceding years.
   Note: Regulation 9(4) If a member is only entitled to count part of the year specified in regulation 8(2) as a period of active membership in relation to the employment which he ceases to hold, his final pay is his pensionable pay during that part multiplied by 365 and divided by the number of days in that part.
3. In the case of part-time employment, the final pay is the pay that would have been paid for a single comparative whole-time employment.
4. Any reduction or suspension of a member's pensionable pay during the final pay period because of his absence from work owing to illness or injury is disregarded.

Regulation 10 - Final pay: reductions

1. Subject to paragraph (2), where a member's pensionable pay in a continuous period of employment is reduced or restricted:
   a) because the member chooses to be employed by the same employer at a lower grade or with less responsibility;
   b) for purposes of achieving equal pay in relation to other employees of that employer;
   c) as a result of a job evaluation exercise;
   d) because of a change in the member's contract of employment resulting in the cessation or restriction of, or reduction in, payments or benefits specified in the member's contract of employment as being pensionable emoluments; or
   e) because the rate at which the member's rate of pay may be increased is restricted in such a way that it is likely that the rate of the member's retirement pension will be adversely affected, the member may choose to have his or her final pay calculated in accordance with paragraph (4), by giving notice:
   i) in writing;
   ii) to the appropriate administering authority; and
   iii) no later than one month prior to the date on which the member ceases active membership.
2. Where notice under this regulation has not been given, and a member to whom it applies has died, the appropriate administering authority may give notice on the member's behalf (whether or not the period within which the member could have given notice has expired).
3. Paragraph (1) does not apply if the member's employment on reduced pensionable pay:
   a) commences before the beginning of the period of ten years ending with the member's last day of active membership;
   b) immediately follows a period in which the member occupies a post on a temporary basis at a higher rate of pay;
   c) is because the member chooses to reduce his or her hours of work or to be employed at a lower grade, for the purposes of regulation 18 (flexible retirement).
4. Subject to regulations 8(3) and 8(4), the calculation mentioned in paragraph (1) is made by dividing by three the member's total annual pensionable pay in any three consecutive years of the member's choice, ending with 31st March, within the period of thirteen years ending with the member's last day of active membership.

The Options (applies to members who have membership prior to 1 April 2014 under the Final Salary regulations) 

The options that are available do somewhat rely on the employee's own personal circumstances and this is by no means an exhaustive list:

• How close is the employee to retirement age;
• How much scheme membership do they have; 
• Do they satisfy the 85-year rule; 
• How old is the employee; 
• By how much is their pay being reduced.

Option 1 - Use the best final salary out of the last three years pay (regulation 8(2))

This option will be of particular importance to employees who are within three years of retirement, whether that be age 60 or Normal Pension Age or somewhere in between (subject to the 85-year rule). If a member is more than three years from retirement this option is of no use.

Option 2 - use the best consecutive three years in the last thirteen (regulation 10(4))

This option will be of interest to members who are within 10 years of retirement at the point from which their pay is reduced but more than 3 years from retirement. If they fall into this category the member can elect, in writing, to have a previous rate of pay used to calculate their benefits.

Option 3 - Defer accrued benefits to date and start again

If a scheme member will not be protected under options one and two above they can elect to defer their accrued benefit to date based on their pay before any reduction is applied and then continue to contribute to the scheme on their lower pay thereby accruing further benefits.

There are some considerations to take into account however, when choosing this option:

• The deferred benefits go up in line with CPI- pay will go up in line with pay awards.
• By 're-joining' the scheme the member is treated as being a new scheme member under the 2008 regulations and therefore loses any 85-year rule protections on the 'new' membership that he may have built up under the 'old' membership. Whilst the 'old' membership will be unaffected and still payable from the member's eligible retirement age, the benefits based on the 'new' membership will be actuarially reduced if taken before the age of 65.
• If the member were to be made redundant (assuming aged 55 or over) in the future having deferred part of their benefits, those deferred benefits would not be brought into immediate payment and would remain deferred until the age of 60 at the earliest. Had the member continued his membership despite the reduction in pay, the whole of his benefits would be brought into payment immediately upon redundancy.
• If the member were to be retired due to permanent ill health in the future a separate decision to release the deferred benefits would have to be taken by the 'former' employer.
• The member can only elect to merge his deferred benefits with his ongoing membership within the first 12 months of re-joining the scheme. If his final pay ultimately exceeds the rate of pay on which his deferred benefits were calculated, plus pensions increases, the two periods of membership cannot be merged.
• Similarly, if the member transfers to another LGPS in the future it is only the latest period of membership that can be transferred to the new scheme. The previous period will remain deferred.

Conclusion

Where a member suffers a reduction in pay for whatever reason it would be advisable for the member to contact the pension team to discuss the options available to him. Each scheme member will have individual circumstances that only the pension administrators will have access to and which will be important to the member when making certain decisions.

Important

LGPS benefits built up before 1 April 2014 are calculated using a member's full-time equivalent rate of pensionable pay. If a member reduces their hours but not their grade, their final pay will be unaffected.

The 85-year rule states that where a scheme member's age in whole years when added to scheme membership in whole years equals 85, that is the point from which benefits can be released without an actuarial reduction being applied. If the 85-year rule is achieved before the age of 60, the member must obtain his employer's consent to release his benefits immediately.

The 85-year rule does not apply to all scheme members and some scheme members have different protections under this rule to others.