Reduction in pay

Effects on pension of reduction in pay. Employer responsibilities: information exchange

The Local Government Pension Scheme (LGPS) to 31  March 2014, was a final salary pension scheme, with benefits assessed on ‘final pay’. Membership in the scheme before 1 April 2014 will keep its link to ‘final pay’ while continuous membership is recognised even when it continues after March 2014.  The type of protection for the final salary benefits will now depend on when the reduction occurs

The Local Government Pension Scheme (Benefit, membership and contributions) Regulations 2007 (as amended) defined the term ‘final pay’ and provides for alternative possibilities when the best final pay period is not one of the last three years of scheme membership. That definition continues in use beyond 2014 for the membership built under those and the 1997 schemes, because of the protections built into the new scheme.

From 1 April 2008, if a  member has a reduction or restriction to their pensionable pay during a continuous period of employment-in certain circumstances a form of pension protection may be possible.

The restriction in pay must be due to one of the following reasons

  • Member chooses to be employed by the same employer at a lower grade or with less responsibility
  • For the purposes of achieving equal pay in relation to other employees with that employer
  • As a result of a job evaluation exercise; or   
  • Because a change in the members contract of employment results in a restriction of  or cessation , or reductionin, payments or benefits specified in the member’s contract of employment as being pensionable emoluments or  
  • Because the rate at which the members rate of pay may be increased is restricted in such a way that that it is likely that the rate  of the members retirement pension will be adversely affected,    

And the reduction must not be following a temporary increase to pensionable pay or after taking ‘flexible retirement’ as  described under these regulations

When the employer has agreed all conditions are satisfied ,and the member leaves active membership within 10 years of the reduction to pensionable pay, the member can choose a different period to calculate the ‘final pay’ to assess the benefit.

Remember – this right did not stop at 1 April 2014  if a person has pre-14 membership the reduction to pay can be after April 2014,    

If the employee leaves within 10 years of the reduction, they may use the ‘Regulation 10’ option. This means the employee can choose to have the average of the ‘pensionable pay’ from any three consecutive years (years ending at 31 March) from their last 13 years of scheme membership. This election can give the member a level of reassurance about protecting the value of their pension built up before April 2014, under the final pay rules.

Pension Services must know that an employer,

  • has recognised a reduction in pay, one which fits the terms of the regulations.
  • will keep adequate pay records to support any election an employee may make
  • will be able to supply details for the member’s ‘pensionable pay’ and ‘final pay’
    • such as the whole time equivalent rates of pay – that is full time not term adjusted - and the effective dates of those changes. More guidance on ‘pensionable pay and final pay’ 

When the member leaves, complete full details of all the relevant periods/rates and effective dates on the ‘MARS’ return.

It is important to note and ensure the member is aware that he/she must make a written election to arrive at Pension Services at least one month before leaving if they want to use this ‘Reg 10’.

An employer has all the pay and contractual details for members, and a practical process is for employers to

  • alert the member to the regulations, ideally at the early stages of the proposed salary change, 
  • advise Pension Services, and
  • start the appropriate record keeping

when a qualifying reduction in pay happens.

Although the member makes the election to the pension fund to use a different period , Pension Services will ask an employer to confirm that the member is making an eligible election.

We have prepared the following templates and guides to help you  If you are in any doubt about the information you should supply, or the scope of this ‘protection’, please get in touch with Pension Services

Download, complete and send to Pension Services

Reduction in pay after April 2014  

Where the member has continuous membership in the LGPS from before April 2014 the link to final pay will continue for the pre 2014 portion of the calculation where the job with the same employer is also continuing.

From April 2014, in the CARE scheme, pension builds up separately year by year based on actual ‘pensionable pay’.  A reduction one year will not devalue the accumulated pension value already built up.

Employers support pensions when pay is reduced due to certified sickness, and ordinary paid child related leave using ‘assumed pensionable pay’    

A reduction in pay may mean an immediate  review of the member’s contribution rate, although this will depend on your policy.