How a drop in pay affects your pension

Your pension is worked out using your pay. If your pay changes it can impact on your pension. If your pay increases, your pension will also increase. If your pay decreases your pension could also decrease.

Pension is calculated differently before and after 1 April 2014. This page explains how a pay drop will impact on both your pre and post 1 April 2014 LGPS pension benefits, as well the protections that you may be able to apply for if you have a drop in pay.

Since 1 April 2014, the LGPS has been a Career Average Revalued Earnings (CARE) scheme. Your pension after 1 April 2014 is calculated on an annual basis. At the end of the tax year, your pensionable pay for the period between the previous 1 April and 31 March is used to work out how much pension should be added to your account for the year.

If your pensionable pay goes down, perhaps because you reduce your hours, or move to a lower grade, it will mean that you will build up less pension than you would have before the change occurred. It will not impact on the pension benefits you have already built up after 1 April 2014.

For more information about how your pension is calculated after 1 April 2014 see How your pension builds up

If your pay reduces because you are away from work due to sickness, injury or certain types of child-related leave, your pension will be calculated using the pay you would normally receive.

If your pay reduces because you are away from work for another reason, you may be able to buy back the ‘lost pension’ to ensure the reduction in pay does not impact on your pension. For more information about which types of leave are protected, see Time away from work

Before 1 April 2014, the LGPS was a final salary scheme. Even though everyone was moved into the CARE scheme from that date, any pension you built up in the final salary scheme will always be calculated under final salary rules.

All the pension you built up before 1 April 2014 will only be calculated when you leave the scheme or retire. If you have been in the scheme for a long time, the majority of your pension may be final salary, so a drop in pay could have a considerable impact on the calculation of your pension overall.

To calculate final salary pension benefits we use ‘final pay’. If your take home pay changes because you go part time or start working term-time only, this will not impact on your ‘final pay’ and consequently the calculation of your pension. This is because ‘final pay’ is an average full-time equivalent figure and does not represent your actual earnings. Full-time equivalent means the pay you would have received if you worked full-time and not term-time only.

If your full-time equivalent salary reduces, perhaps because you moved to a lower grade, this could impact on your final salary pension.

For more information about how final salary pension is calculated, see If you were in the scheme before 1 April 2014

There are two protections in the LGPS that can protect your final salary pension if you have a drop in your full-time equivalent pay.

Under the regulations, we can use the highest ‘final pay’ of the three years prior to your leaving date.

For example, if your leaving date is on 23 August 2023, your employer will work out your ‘final pay’ for the following three periods:

• Year 1: 24 August 2022 to 23 August 2023
• Year 2: 24 August 2021 to 23 August 2022
• Year 3: 24 August 2020 to 23 August 2021

We will then multiply the ‘final pay’ for each year by the relevant pensions increase percentage. We will then use the highest figure to calculate your pension.

Everyone is entitled to use ‘the best of the last three’ rule to calculate their pension. You don’t need to ask us to look into this, we will check it automatically when you leave the scheme or retire.

You may also qualify for a deeper calculation that will allow us to use an even earlier pay to calculate your pension. If you qualify for this protection, we can use the best average ‘final pay’ for any three consecutive years, going back 12 years prior to 31 March before your last day of service.

For example, if you left on 23 August 2023, your employer would supply us with the ‘final pay’ for the following periods:

• Year 1: 1 April 2022 to 31 March 2023
• Year 2: 1 April 2021 to 31 March 2022
• Year 3: 1 April 2020 to 31 March 2021
• Year 4: 1 April 2019 to 31 March 2020
• Year 5: 1 April 2018 to 31 March 2019
• Year 6: 1 April 2017 to 31 March 2018
• Year 7: 1 April 2016 to 31 March 2017
• Year 8: 1 April 2015 to 31 March 2016
• Year 9: 1 April 2014 to 31 March 2015
• Year 10: 1 April 2013 to 31 March 2014
• Year 11: 1 April 2012 to 31 March 2013
• Year 12: 1 April 2011 to 31 March 2012

Next, we get an average of each consecutive three-year period, beginning with the earliest.

For example, the first three-year average would be calculated as = (year 12 + year 11 + year 10) / 3 = First average ‘final pay’

The second would be calculated as = (year 11 + year 10 + year 9) / 3 = Second average ‘final pay’

We will keep doing this until we have 10 average ‘final pay’ figures.

We will then multiply each ‘final pay’ by the relevant pensions increase percentage. We will use the highest to calculate your pension.

Sometimes a lower ‘final pay’, when multiplied with the pensions increase percentage, will produce a higher ‘final pay’ overall.

You will only qualify for this protection if the pay drop occurred within 10 years of leaving due to one of the following reasons:

• you moved to a job with less responsibility under the same employer (e.g. you moved to a position with a lower grade),
• your pay reduced as a result of a job evaluation exercise or equal pay exercise
• your pay reduced because the pensionable pay set out in your contract changed
• you may also qualify for this protection if your pay is not reduced, but the increases to your pay were restricted

You will not qualify if your pay reduced because:

• you took up a temporary position (e.g. secondment/acting up)
• you took flexible retirement and moved to a lower grade or took a lower salary
• your actual pay went down (e.g. you reduced your hours, but your contractual full-time equivalent salary did not go down)
• you had previously received additional payments, for example due to arears or a performance related pay award that you do not receive the following year

If you believe you may qualify for this protection, you must confirm this to us.  When we receive notification from your employer that you are retiring, we will write to you to ask if you think you may qualify for ‘final pay’ protection.

Unless you have opted out of electronic communications, we will upload the letter to My Pension Online and email you to let you know it is ready to view.

If you think you qualify for the protection you should let us know by:

• 3 weeks of receiving the ‘final salary pay protection’ letter,
• Or where it is earlier, 3 weeks from your last day of service

If you know you are retiring, you don’t need to wait for this letter to tell us. If you believe you may qualify, please let us know as soon as possible.

We will contact your employer to ask if they agree that you will qualify. If your employer agrees, they will provide us with the additional final pay calculations.

Once we have worked out your pension, we will confirm to you if final pay protection applied and if so what ‘final pay’ was used.

For more information, see The retirement process

Your employer provides us with your pay information.

You can find the pay used to calculate both your pre and post 1 April 2014 pension on:

• Your annual benefit statement
• Any retirement estimate you receive from us or on My Pension Online
• Your retirement pack

If you disagree with the pay used to calculate your pension, you should contact your employer in the first instance.

You also have the right to appeal under the Internal Dispute Resolution Procedure (IDRP).