Pay
In addition to membership, final pay forms the most vital part of any benefit calculation. In most instances a member's final pay will be the earnings on which pension contributions have been deducted in respect of the last 365 days of employment. In certain cases, however, where one of the previous two 365 day periods yields a higher figure, one of those periods can be chosen as the preferred final pay, hence the phrase "the best of the last three years".
Where a member has had a break in membership during the last year, for the purpose of calculating final pay, it is still the last 365 days of pensionable pay that is used e.g. date of leaving is 31st July 2004 but there was break in service from 2nd April 2004 to 13th April 2004. The last 365 days will be 20th July 2003 to 1st April 2004 + 14th April 2004 to 31st July 2004.
It is also important when calculating final pay figures to proportion any bonus payments that may have been received by the employee in the last year of work but which related to additional duties undertaken for a period covering only part of the last year of employment e.g. a bonus payment is made for work undertaken from 1 April 2005 to 31 March 2006. The employee leaves on 31 July 2006. Even though the bonus payment may have been made in April 2006 only three quarters of the value of the bonus payment relates to the last year of employment i.e. August 2005 to March 2006.
Whereas membership in respect of a part time employee is calculated at the part time rate, the final pay is calculated at the full time equivalent rate. For example, a scheme member who works part time for 10 years at a rate of 50% will accrue 5 years membership. However assuming that member now retires, the final years part time salary may be £10,000 but for benefit calculation purposes final pay will be £20,000 i.e. Annual pension = 5 / 80 x £20,000.
An alternative final pay period could be one protected by the issue of a certificate of protection of pension benefits as defined under regulation 23 of the LGPS Regulations 1997 or, since 1 April 2008, could be the pay received in any 3 consecutive years ending 31 March during the last 10 years of employment.
When calculating a final pay figure, Form LGS18 can be completed and attached to the leaver Form LGS15C. In this way the pension administrators can check the figures calculated and query any inconsistencies that they may find.
Meaning of pay
Regulation 4 of the LGPS (Benefits, Membership and Contributions) Regulations 2007 outlines the meaning of pay and says that an employee's pay is the total of:
a. all the salary, wages, fees and other payments paid to members' for their own use in respect of their employment; and
b. any other payment or benefit specified in the contract of employment as being a pensionable emolument.
Exclusions from pay
An employee's pay does not include:
a. payments for non-contractual overtime;
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 employment;
e. any payment as an inducement not to terminate employment before the payment is made.
No sum may be taken into account when calculating final pay unless income tax liability has been determined on it i.e. pension contributions can only be deducted from pay which is taxable.
