Pensionable pay

Introduction

Pensionable pay refers to the elements of an employee’s earnings that are used to determine both the contributions paid into the LGPS and the pension benefits the employee will ultimately receive.

Pensionable pay includes all payments made to an employee, except for specific exclusions. It also includes any benefits explicitly stated in the employee’s contract as pensionable.

Pensionable pay definition

Pensionable pay as defined in the includes:

• all the salary, wages, fees and other payments paid to the employee
• any benefit specified in the employee’s contract of employment as being a pensionable emolument.

The following are excluded from pensionable pay:

• payments not subject to income tax
• travel, subsistence or other expense allowances
• payments for loss of holidays
• payments in lieu of notice
• payments that are inducements not to terminate employment
• the value or cash equivalent of a provided motor vehicle
• payments for loss of future pensionable benefits
• equal pay compensation (excluding arrears of pay)
• payments made by the Scheme employer during reserve forces service leave
• returning officer, or acting returning officer fees except those for:
  • local government elections,
  • elections for the National Assembly for Wales,
  • Parliamentary elections, or
  • European Parliamentary elections.

Supplements paid in recognition of contribution rate differences

In addition to the exclusions listed in the 2013 regulations, the transitional regulations also exclude any supplement paid in recognition of contribution rate differences between the LGPS and the Civil Service Pension Scheme if they were paid to:

• an employee whose employment transferred on 1 April 1996 to the Environment Agency or subsequently to Natural Resources Wales on 1 April 2013, or
• an employee whose employment transferred on 1 April 2010 from the Learning and Skills Council for England to a local authority or to London Councils Limited.

Provision of a motor vehicle

Despite the exclusion of the value or cash equivalent of a provided motor vehicle, such amounts remain pensionable if:

• the employee’s pensionable pay included such a benefit on both 31 December 1992 and 31 March 1998, or
• the employee was converting the provision of a motor vehicle into an amount paid in lieu of such a provision where the process was concluded before 1 July 1995 and the employee’s pensionable pay at 31 March 1998 included such an amount.

In both cases, the benefit remains pensionable until the it stops or the employee leaves the employment with the employer who was employing them on 31 December 1992, unless they were compulsorily transferred to another Scheme employer.

Pensionable pay in the 2008 Scheme

In some circumstances, such as calculating final pay for benefits accrued under earlier schemes, the 2008 Scheme definition of pension pay applies. While broadly similar to the 2014 definition, there are three key differences:

• Non-contractual overtime was not pensionable in the 2008 Scheme but is pensionable from 1 April 2014
• Payments for loss of future pensionable payments or benefits were pensionable in the 2008 Scheme but are not pensionable in the 2014 Scheme.
• Actual pay to reservists from the Scheme employer was pensionable in the 2008 Scheme. In the 2014 Scheme, the employee and the Ministry of Defence pay contributions based on Assumed Pensionable Pay (see Section 11).

Pension contributions should not be deducted from a payment that was pensionable in the 2008 Scheme but is not pensionable in the 2014 Scheme. However, employers should include the payment when they work out final pay, if it falls in the relevant period, even though pension contributions have not been deducted from it.

If a payment was not pensionable under the 2008 Scheme but is pensionable in the 2014 Scheme, pension contributions must be deducted from it. The employer should not include the payment when they work out final pay.

When to calculate final pay

Employers must provide a final pay figure based on the 2008 Scheme definition when a member with final salary benefits or underpin protection leaves the Scheme. Employers will also need to provide final pay figures for these members for the year ending on other dates while they are active members:

• every 31 March for annual benefit statements
• 5 April for members who have exceeded or are close to exceeding the annual allowance
• their 2008 Scheme normal pension age (usually age 65), for members protected by the underpin.

Employers will not always know that a member has final salary benefits. The administering authority will be able to confirm whether a final pay figure is required for a particular member.

How to calculate final pay

Visit Employer bitesize training to find out about calculating final pay.

In most cases, final pay is the total pay earned, and on which contributions were paid or deemed to be paid, for the last 365 days of LGPS membership. For part-time members, the final pay is the whole-time equivalent pay.

Where pay for either of the immediately preceding two years would give a higher figure, that pay figure is used. This is referred to as ‘best of the last three years’. For someone leaving on 13 August 2025 for example, you would compare whole-time equivalent pay in the year to 13 August 2025, year to 13 August 2024 and year to 13 August 2023 to see if either of the previous years was higher than the last.

Any member having a pay cut or restriction in certain circumstances within the last 10 years of employment has the right to use the best average pay figure from any consecutive three-year period in the last thirteen years of membership. For simplicity, these thirteen years all end on 31 March, not on the anniversary of the date of leaving. To ensure that the pay figures are considered equally, pensions increase is added.

The protections apply where the member’s pensionable pay was cut or restricted for a variety of reasons, including:

• the member chooses to move to a lower graded post or a post with less responsibility
• to achieve equal pay with other employees
• job evaluation exercise
• removal or reduction of pensionable emoluments
• restriction of future rates of pay increase.

The protections do not apply where the member’s pay reduces after taking flexible retirement or after the end of a period when they temporarily received a higher rate of pay.

Pay protection continues to apply to members whose pay reduced or was restricted after 31 March 2014.

Variable time members are not paid an hourly rate and do not have a contract which stipulates a specific number of hours that they must work. Instead, they are paid in relation to their duties, which are only performed occasionally. For example, Returning Officers and clerks to school governors who are paid a fixed amount each month.

Casual employees or those employed on zero-hours contracts are not variable time members. Their pay is based on an hourly rate or a rate for performing a particular duty.

Where pensionable pay is based on fees, the average of the fees for the last three years is used when calculating final pay. At the employer’s discretion, the average of fees paid for any three consecutive years ending on 31 March in the ten years before leaving can be used.

Membership for a variable time member is calculated as calendar length.

You administering authority will let you know when you must calculate final pay and how to share the information with them.

Pensionable pay and salary sacrifice

HMRC approved salary sacrifice arrangements where an employee has their contractual pay reduced by an agreed amount (supported by a variation to their contract) in return for a tax assessable benefit in kind, from which income tax liability may or may not then be removed, are pensionable under L G P S (where the benefit in kind is specified in the employee’s contract of employment as being a pensionable emolument).

The exception is any salary sacrificed for a car or any other motor vehicle, which cannot be pensionable.

However, from 6 April 2017, significant reforms to salary sacrifice arrangements were introduced by the Government. These reforms markedly restricted the types of benefits in kind which can benefit from income tax and National Insurance contribution (NIC) advantages via a salary sacrifice arrangement. Employer contributions into registered pension schemes were excluded from the April 2017 changes. Employers and LGPS members can continue to benefit from income tax and National Insurance savings when pension contributions are paid through a salary sacrifice arrangement.

Salary sacrificed through a Shared Cost Additional Voluntary Contribution (SCAVC) is pensionable if the employer specifies in the employee’s contract of employment that the contribution the employer makes to the SCAVC is a pensionable emolument.

Where holiday entitlement is sold in return for additional remuneration, the extra pay is non-pensionable, because it is a ‘payment in consideration of loss of holidays’.