Pensionable salary calculation for CSPS Premium

ManaLeh

I'd appreciate some advice please.

In a recent post, Hugheskevi explained the calculation of final pensionable earnings under the Classic scheme - If a recent salary figure is higher than a previous one (albeit that applying CPI to the earlier figure would give a more favourable overall outcome) the more recent figure (without any CPI adjustment) would be used.

I'd be grateful if anybody (possibly Hugheskevi?) could tell me whether the same logic applies to the Premium scheme.

The reason for asking is that I recently had a 12 month period at a higher salary. Having been back at my substantive grade for 18 months an opportunity has arisen to apply for a new post on the higher grade again.

My plan is to leave the CS before March 2025 to ensure the period of higher salary counts towards my final pensionable calculation. I'm 55 and don't plan on taking my pension until 60 - so it will be deferred for a couple of years.

I'm interested in whether accepting the new post would limit the CPI opportunity on my earlier salary, as it would for Classic. Normally it wouldn't feel so important but with current CPI rates it feels potentially significant.

When describing the calculation of pensionable earnings my guidance booklet says, "we will take account of rises in the cost of living in making the comparison". I'd assumed this meant the Classic approach doesn't apply but confirmation of whether I'm correct would be really appreciated.

Many thanks

hugheskevi

In a recent post, Hugheskevi explained the calculation of final pensionable earnings under the Classic scheme - If a recent salary figure is higher than a previous one (albeit that applying CPI to the earlier figure would give a more favourable overall outcome) the more recent figure (without any CPI adjustment) would be used.

I'd be grateful if anybody (possibly Hugheskevi?) could tell me whether the same logic applies to the Premium scheme.

No, the Premium pension scheme works differently to classic and applies inflation to past years of salary before considering which figure gives the highest final pensionable earnings.

The best final pensionable earnings is the highest from 3 tests:

• your last 12 months’ pensionable earnings; or
• your highest pensionable earnings in any of the last four complete scheme years; or
• your highest average pensionable earnings in any period of three complete scheme years during the last 13 years ending on your last day of service.

For the 2nd and 3rd bullets above, it is the inflation-adjusted pensionable earnings in the past scheme year which is used to determine the best figure (although if commencing pension prior to age 55 the inflation adjustment only applies after 55, other than for ill-health).

The reason for asking is that I recently had a 12 month period at a higher salary. Having been back at my substantive grade for 18 months an opportunity has arisen to apply for a new post on the higher grade again.

My plan is to leave the CS before March 2025 to ensure the period of higher salary counts towards my final pensionable calculation. I'm 55 and don't plan on taking my pension until 60 - so it will be deferred for a couple of years.

I'm interested in whether accepting the new post would limit the CPI opportunity on my earlier salary, as it would for Classic. Normally it wouldn't feel so important but with current CPI rates it feels potentially significant.

When describing the calculation of pensionable earnings my guidance booklet says, "we will take account of rises in the cost of living in making the comparison". I'd assumed this meant the Classic approach doesn't apply but confirmation of whether I'm correct would be really appreciated.

You are correct - accepting the new post cannot cause detriment in terms of the final pensionable earnings calculation and could be beneficial.

It may be important to note that the scheme year runs from 1 April - 31st March. If your previous 12 months of higher salary was half in one scheme year and half in another scheme year it would be a lot less beneficial than if the period coincided with the scheme year.

One thing that may be something to consider in the future is whether there is a benefit in locking in a 12 month period of higher pensionable earnings that doesn't coincide with the scheme year. This can be done by switching to the alternative Partnership scheme at the appropriate time. That would cause the Premium pension to be calculated as at the last day of scheme membership and a deferred award created based on the highest pensionable earnings at that time, and so can lock in higher earnings from last 12 months. If your new role is permanent that wouldn't be a consideration however.

It is very useful to keep track of pensionable earnings in each scheme year, the inflation adjustment which applies, and how the 3 tests above affect the calculation. Many members have their best inflation-adjusted pensionable earnings from around 2010/11 due to subsequent pay freezes/restraint/pauses and these years are now dropping out of the 13 year look-back. This can cause significant detriment to the pension, but members are largely ignorant of this as they are not provided with any of the details so unless they do the calculations themselves will never even know what they are losing and not consider whether switching to Partnership may be appropriate (eg if they are retiring relatively soon).

Cotrelone37

Hi, I recently had a thread on pensionable salary for the classic scheme which I am grateful to Hugheskevi for answering. There were others though.

I might be misreading your post but you mentioned that you are now back at your substantive grade. Was that a period of acting up?

It may not be the same across all departments and all types but in my current one,periods of temporary responsiblity supplements are not pensionable. However in my case I received an allowance which was explicitly pensionable for 12 months.

Sorry if I am asking a silly question!

hara____

It's not surprising most people aren't aware of the '13 year rule' in Premium - the statements are opaque, not even showing the true value for 'final pensionable earnings'.

Does anyone know exactly how the inflation uplift is calcuated for past years? Is it the september CPI index for the relevant years, so from 2010/11 to this september, could be something like 122.5/89.8 meaning a 36% uplift, assuming the CPI index for this september is close to the one published today?

hugheskevi

Does anyone know exactly how the inflation uplift is calcuated for past years? Is it the september CPI index for the relevant years, so from 2010/11 to this september, could be something like 122.5/89.8 meaning a 36% uplift, assuming the CPI index for this september is close to the one published today?

September CPI, with each year inflated by the September CPI figure following the end of that year, eg, 2020/21 is inflated by September 2021 CPI figure of 3.1%. The most recent complete year (ie 2021/22 currently) is not adjusted. 

2010/11 is currently adjusted by 25.4%, prior to the big increase coming at the end of this scheme year. 2009/10 has an adjustment of 29.3% and 2011/12 has an adjustment of 19.2% - those are quite big differences, reflecting the volatile inflation around that period.

Due to big volatility in those past periods combined with very high inflation currently, there is the potential to lose out considerably by an ill-timed retirement or leaving the scheme at an unfortunate date.

hara____

Thanks again hugheskevi, useful to have the confirmation.

Completely agree that it could be an important factor for people near to retirement.

Less clear cut for me - losing 2010/11 from future calculations will be annoying when it happens but I'm not yet convinced that switching to partnership would be a worthwhile trade-off.

hugheskevi

hara____ said:

Thanks again hugheskevi, useful to have the confirmation.

Completely agree that it could be an important factor for people near to retirement.

Less clear cut for me - losing 2010/11 from future calculations will be annoying when it happens but I'm not yet convinced that switching to partnership would be a worthwhile trade-off.

One thing to remember is that if you leave the scheme and rejoin within 5 years the deferred award created on leaving is canceled and final salary links are re-established. That can give a helpful option should things turn out in a particular way..

Switching to Partnership would nonetheless mean exchanging alpha for Partnership which probably isn't a good deal, especially for older members, so it is important to take into account all considerations - leaving a DB scheme is not something which should be done lightly.

ManaLeh

@Hugheskevi - thank you very much for the reply and for taking the time to provide really useful information around timing and ways to make the most of my situation.

Fortuitously my temp promotion aligned reasonably closely with the financial year, by luck rather than judgement.

You gave an equally helpful answer to my first post, back in March 21. Since then I have been making additional contributions to the AVC scheme but need to do some more maths as I think I may start to hit issues with the annual allowance soon. The temp salary uplift caused a big jump in my ‘pension savings’ figure and as I understand it the expected CPI increases will also impact, even without pay rises.

I've also been trying to account for the McCloud judgement and noted your comments on other threads about the value of Alpha often being overlooked. Even with the reduction for early payment I was surprised at how closely my Alpha accrual appears to compare to adding 7 years of reckonable years to my Premium calc. I had assumed Premium would win easily.

Cotrelone37 said:

Hi, I recently had a thread on pensionable salary for the classic scheme which I am grateful to Hugheskevi for answering. There were others though.

I might be misreading your post but you mentioned that you are now back at your substantive grade. Was that a period of acting up?

It may not be the same across all departments and all types but in my current one,periods of temporary responsiblity supplements are not pensionable. However in my case I received an allowance which was explicitly pensionable for 12 months.

Sorry if I am asking a silly question!

Not a silly question at all. It's classed as Temporary Promotion and, as you can probably imagine, I did do some homework to check it was pensionable; since confirmed by last year's benefit statement.