Pay cuts can have an impact on your pension. Some of the general principles are outlined below.


How Your Benefits are Worked Out

As the Local Government Pension Scheme is a Final Salary scheme we use your pensionable service and pay to work out your benefits when you leave or retire.

We would normally use the pensionable pay that you have received in the last 12 months before leaving to work out your benefits. This is because generally speaking pay increases annually due to pay awards.

If your pay drops (eg: because of a pay evaluation exercise by your employer) using your last year's pay may not be the best thing to do.


What will happen if I have a drop in pay?

If your pay drops because you reduce your working hours we don't consider it as a reduction in pay. This is because we always use the notional full time pay that you would have got, to work out pension benefits for part-time members.

Your pension benefits will be less because of a reduction in hours as your service is proportioned down for pension purposes. This means that the service we use to work out your pension benefits will be less than if your hours had not reduced.


Best of the last three years' pay

All members are allowed to have their pension benefits worked out on the best year of the last 3 before you leave/retire. So if you take a drop in pay close to when you are retiring this may protect you.

You do not need to do anything as your employer will automatically check if one of the previous year's pay is higher when you leave.
They will tell WYPF so that we can use the higher pay to work out your benefits.


Choosing a 3 year average in the last 10 years

If you take a pay cut in the last 10 years before you leave you can choose to have your benefits worked out using an average pay from a three year period within that 10 years.

The 3 year period must end within the last 10 years since the pay drop and end with a 31 March.

We will use the average pay from the period to work out your benefits and then add inflation proofing to them as well.

None of us can see what will happen to us in the future but this pension protection may also help if any of the following happen in the 10 year period:

• You retire

• You decide to leave your job before retirement. We will be able to use the average pay to work out your deferred benefits.

• If you decide to leave and then ask us to transfer the benefits you have built up to another pension scheme, the transfer value will be based on the average pay.

Before 1 April 2008 you needed a special certificate from your employer for your benefits to be protected in this way.

But this isn't needed for a drop in pay on or after this date. Your employer should inform WYPF if you suffer a drop in pay and your benefits could be protected in this way.

You do not need to contact us about it. But it might be a good idea to contact your employer's Pension Liaison section and check that they have let WYPF know and that they will be keeping your payroll records for at least 10 years. Make sure that you keep any paperwork about your drop in pay in case you're asked to produce it in future.

If your employer tells WYPF that you have suffered a drop in pay we will write to you to confirm this. A flag will be placed on your pension record and we will contact you about your options at the earliest of:

• When you are leaving/retiring, or

• At the end of the 10 year pension protection period.

Splitting Your Pension Benefits (Only if Allowed by Your Employer)

If your pay drops because you have previously been acting up in another position which is ending and you are returning to your permanent post, you cannot use a 3 year average in the last 10 year period.

Your employer can choose to split your pension benefits at the date of the pay drop (they do not have to). This would mean that the benefits you have built up before the pay drop are protected as they are worked out on the higher pay. They will also be increased in line with inflation each year.

You would then start to build up a new set of benefits based on the lower pay and your pensionable service from the date of the pay drop. So your future benefits are not protected.

There are certain issues that you may need to consider if your employer agrees to split your benefits:

• Your new set of benefits may have a later normal payment date. So if you take your benefits before that date they will be reduced.

• If your future pay increases and overtakes your previous higher pay it might have been better to have all your benefits linked. You will be given this option but it is only allowed within 12 months of the date of your drop in pay.

• If you had to retire early in the future (eg: because of ill health or redundancy) your employer might not allow you to have early payment of your deferred benefits at the same time.

• But, if you were to die in service the death grant payable may well be higher than if you had linked your service together.
  

Unsure if any of this applies to you?

We hope that this information is helpful in explaining some of the issues that affect your pension benefits. The information outlined above is only very general and will not cover individual situations fully.

If you think that you may be affected by a drop in pay personally, talk to the Pension Liaison section at your employer to get further information.

If you would like more general information about these issues please get in touch with WYPF. Our general helpline number is: 01274 434999 or you can email us at wypf@bradford.gov.uk