Prudential’s Guide to calculating Public Service Pension Input amounts
14 August 2018
The question we get asked most frequently about public service pension schemes is how to calculate pension input.
It’s always been a messy business, but now that many members will have both final salary and career average benefits, you’ll need to be prepared to get properly submerged in the technicalities of benefit accrual.
Because the full calculations can be so complex, we’ve given both full-fat and low-fat options for estimating pension input. Because even if you take the time and trouble to work through the numbers to your clients, you’ll usually only be able to position the result as an educated estimate. You’re unlikely to have access to enough data to do anything else for reasons which will become clear throughout the course of this guide.
A typical calculation for 18/19 is shown below together with some explanatory notes. In this example items highlighted in red are final salary benefits whilst those highlighted in blue are career average benefits.
1. Step 1 – establish accrued rights at start of PIP
We recommend always obtaining this value from the member’s most recent Annual Benefit Statement. This will normally(Note 1)give you accurate information about benefits accrued and the member’s accurate pensionable pay figure(Notes 2 & 3)at the end of the previous scheme year(Note 4).As the scheme year is not aligned with the PIP/tax year, an adjustment will then need to be made to include accrual for the period 1stApril to 5thApril.
Final salary accrued pension: Final salary service * final pensionable pay at 5.4.18 / final salary accrual rate
Career average pension to 31.3.18: Pension accrued to 31.3.18 in member’s pension account (as per 17/18 benefit statement)
Career average pension 1.4.18 – 5.4.18: Pensionable pay earned 1.4.18 – 5.4.18 /career average accrual
Career average revaluation on 1.4.18: career average pension built up to 31.3.18 * relevant revaluation factor (Note 5)
Total Accrued Pension at 5.4.18 Note 6
Final Salary lump sum (if any): Final salary service * final pensionable pay at 5.4.18 / final salary accrual rate * 3
2. Step 2 – establish opening value
((Total accrued pension * 16) + Final salary lump sum) * 1 + September 2017 CPI
3. Step 3 – establish accrued rights at close of PIP
Final salary accrued pension: Final salary service * final pensionable pay at 5.4.19 / accrual rate
Career average pension at 1.4.18: Career average pension to 31.3.18 revalued by relevant factor
Career average pension 1.4.18-31.3.19: Pensionable pay earned over PIP 18/19 /career average accrual rate
Career average pension revaluation: Career average pension accrued to 31.3.19 revalued by relevant factor
Career average pension 1.4.19-5.4.19: Pensionable pay earned 1.4.19 – 5.4.19 / career average accrual rate
Total Accrued Pension at 5.4.19
Final Salary lump sum (if any): Final salary service * final pensionable pay at 5.4.19 / final salary accrual rate * 3
4. Step 4 – establish closing value
5. Step 5 – calculate Pension Input Amount (PIA)
6. Carry Forward
Establishing whether any carry forward is available will involve performing the above calculations for each of the 3 previous tax years. So it is not something for the fainthearted, the time-poor or the risk averse. We would strongly recommend that any adviser looking to estimate a client’s Annual Allowance position should ask the scheme for a Pension Savings Statement for the previous tax year. This will show accurate PIA amounts for that year and the 3 previous years. Multiple statements may need to be requested where the client has both final salary and career average benefits and/or where there has been excess input in one of the 3 previous tax years.
Other points to note:
Defined Benefit top-ups
Where a member has an unexpired Additional Pension or Added Years/ membership contract, the pension input amount is NOT the member’s contributions, but is the pro rata amount of additional pension or service credit to the member during the relevant tax year. So it is essential to understand the member’s contract terms – how much extra pension is being purchased over how many years and when the contract started.
Other typical adjustments
Below are noted some of the situations where adjustments will need to be made to PIA.
a) Late Retirement factors
Whether and how benefits taken late (after normal retirement age) are uplifted is set out in individual scheme regulations and statutory guidance. Typically, however, career average benefits and final salary NPA 60 benefits may be actuarially enhanced if taken late. Where a member remains in service beyond normal retirement, PIA should include this actuarial uplift to benefits as well as the continuing accrual. The uplift factors to be used are set by the Government Actuary and are usually available from the scheme’s website.
b) Transfer Club Transfers
Transfers between public sector schemes under Club Transfer rules will NOT result in an increase to PIA where adjustments are made to account for differences in scheme design. However, enhancements outside of these broadly actuarially neutral adjustments WILL result in an increase to PIA. In particular, where final salary benefits are transferred and the final salary link is retained following transfer, the transferred benefits from the sending scheme will be linked to the salaries earned in the employment under the receiving scheme. This increases the member’s pension rights in the receiving scheme and this increase must be included in PIA. Where the transfer is of career average benefits, the transferred rights are ring-fenced by the receiving public sector scheme and are revalued by the same rate that would have applied under the sending scheme. Any enhancement to rights arising from this must also be included in PIA. The relevant calculations are complex and an adviser would do best to check with the receiving scheme for impacts on their client’s PIA.
c) Re-employment following a break
Some schemes such as the teachers’ schemes and NHS revalue deferred members’ career average benefits by a lower rate than that which is applied to active members’ benefits. However, if an individual is out of service for no more than 5 years they are deemed to have remained in active membership throughout the break. In this case the in-service revaluation rate is retrospectively applied on the individual’s return to work and this adjustment will give rise to PIA. Where your client is returning to work following a break in service it would make sense to check with the relevant scheme whether this will have any impact on PIA.
If the above has left you reaching for the smelling salts, we’d suggest simply making a broad assessment of estimated PIA and applying a risk-adjusted margin to the amount of contribution “headroom” (if any) determined by this quick and dirty method. For example, for a teacher, career average benefits build up at a rate of 1/57thof pensionable earnings. So a broad estimate of PIA before application of a risk margin would be:
Estimated pensionable earnings for the year * 1/57 * 16
A risk margin would then need to take into account relevant factors such as:
If you take nothing else from this piece, please always remember to position any numbers you provide to your client as estimates – particularly if your client is looking to max out their annual contributions and there’s little or no carry forward available to mop up any excess input. Modellers such as those available from HMRC http://www.hmrc.gov.uk/tools/annual-allowance/index.htm or the Defined Benefit Pension Input Amount Tool available on from www.pruadviser.co.uk can be used where your client has final salary benefits only, but there will still be residual risk arising from the complex definitions of final pensionable pay.
Note 1 – Annual Benefit Statements
Under the provisions of the Public Service Pensions Act 2013, schemes must provide an Annual Benefit Statement by 31stAugust following the end of the relevant scheme year. In circumstances where employers have not provided all the relevant data to the scheme, the Statement may be partially based on estimated data. In particular this can be the case with Statements produced by NHS Pensions and where this applies you’ll see a disclaimer to that effect on the document itself. This will mean that any estimate an adviser provides is itself based on an estimate and the perilous nature of depending on it should therefore be highlighted to clients.
Final salary accrued benefits and career average benefits may be shown separately (or indeed be included on separate statements) so rights will need to be added together
Note 2 – (Final) Pensionable Pay
For career average benefits, the amount of benefit accrued in a particular year will be the relevant proportion of the pensionable pay they earned over that year.
Where the member also has final salary benefits (either because they are a “protected member” who has not moved to career average accrual or because their final salary benefits remain linked to the pay they earn in the career average scheme under the “final salary link”), then the pay figure to be used when calculating out accrued benefits is more complex. The figure to be used is typically a form of average pay determined on a “best of “ basis. Thus, for example, for an NHS 1995 section member, the pay figure to be used is the pensionable pay earned over the last year or one of the 2 previous years if higher. For a 2008 section member, on the other hand, accrued benefits are calculated using the average of the best 3 consecutive years’ pensionable pay in the last 10. If an adviser uses an incorrect pensionable pay figure, the accrued benefits calculation will be incorrect which means that pension input calculation will also be incorrect.
Note 3 – Final Salary Link
Members who’ve moved to their scheme’s career average arrangement could still have pension input from their pre- 1stApril 2015 (pre 1stApril 2014 for the LGPS in England & Wales) final salary benefits due to the so-called “final salary link”. Under this arrangement as long as there has been no break in public service pension scheme membership covering or after 1stApril 2015 (1stApril 2014 for the LGPS in England & Wales), the member’s accrued final salary benefits will continue to accrue by reference to the salaries the member earns while in pensionable service under the career average scheme. So if the member has had a payrise over the PIP then their final salary benefits will have grown over the PIP giving rise to PIA.
Note 4 – Scheme Year
The scheme year for Public Service Pension Schemes runs from 1stApril to 31stMarch the following year
Note 5 – Revaluation
Members’ benefits accrued in the career average schemes are revalued each year on 1stApril by reference to a prices or earnings metric depending on what is specified in their scheme regulations. The measure of prices / earnings to be used for this purpose is determined by HMT and set out by Treasury Order each year. To date, CPI to September before the start of the relevant tax year has been used for those schemes using the prices measure and the Whole Economy Average Weekly Earnings (non-seasonally adjusted and including bonuses and arrears) up to September before the start of the relevant tax year has been used as the earnings measure. This means that in either case, accrued benefits are revalued by 3% on 1stApril 2018 and this revaluation must be included in the opening value of benefits on 6thApril 2018. Accrued career average benefits to 31stMarch 2019 will be revalued again on 1stApril 2019 using CPI/Average weekly earnings from September 2018 and this revaluation (or an estimate) must be factored into the closing value of benefits at 5thApril 2019. Data for this purposes can be obtained from the Office of National Statistics.
Schemes using the prices measure are: NHS, Teachers, LGPS, Police, Judicial, Civil Service
Schemes using the earnings measure are: Fire and Armed Forces
Note 6 – Revaluation in Practice
The table below is an example of how revaluation would work for an LGPS member. As noted under point 5 above, the LGPS uses the prices measure. In this case we’ve assumed that CPI is the measure used and that this is 1.5% for each year. We’ve also assumed that the client’s earnings increase by 1% p.a.