The effect of Part-Time working on Membership and Pay
Changing the number of contractual hours you work will affect the pension you will receive from the scheme. As a general rule if you reduce your hours your eventual pension will be smaller and if you increase your hours your eventual pension will be bigger.
It is important to note however that changing contractual hours only has an impact on the benefits you build up from the date you change hours unless you are also changing your hourly pay rate.
To explain and illustrate the above two paragraphs we have created some examples where a member changes their contractual hours. But first you need to be aware of the factors that are required in order to calculate benefits.
1. Membership
The Membership period used in calculation of benefits is called reckonable membership and is the total number of years and days you have built up whilst you have been paying into the LGPS. If you work full-time, your reckonable membership counts day for day, if you are (or have ever been) part-time, your membership will have been accumulating at a reduced rate, in accordance with the contractual hours you work.
This is fair because, if you work half-time and earn half the pay of a full-timer in an equivalent job, you only pay half the contributions.
Most of the employers within the pension fund regard part-time to be anyone with contractual hours less than 30 hours per week. However there are some employers (Barnsley Council being one) that regard anyone with contractual hours less than 37 hours per week to be classed as part-time. As a general rule your contract of employment should state whether you are part-time or full-time. If you are not sure please check with your employer.
2. Pensionable Pay
Pensionable pay is the contractual pay on which you pay contributions. If you are part-time, the pay used to calculate your scheme benefits is increased to what it would have been if you had been working full-time in an equivalent job. This ensures that your pay remains constant even though you may have accumulated fluctuating reckonable membership due to numerous changes of contractual hours.
All members will have their contribution rate determined by reference to seven earnings bands. Members who are part-time members will be assessed on the full-time pay rate for their job although they will only pay contributions on the pay they actually earn.
Contribution Bands 2011/2012
Pensionable Pay Contribution Rate
Up to £12,900 5.5%
Above £12,900 up to £15,100 5.8%
Above £15,100 up to £19,400 5.9%
Above £19,400 up to £32,400 6.5%
Above £32,400 up to £43,300 6.8%
Above £43,300 uo to £81,100 7.2%
Above £81,100 7.5%
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Scenario
A full time member earns £20,000 per year. They want to know the effect of working part-time at a rate of 50% of the whole time equivalent hours. The member has built up 20 years membership and has 10 years to go until retirement.
Example 1 – Effect on amount of Contributions Deducted
A member who earns £20,000 a year has a contribution rate of 6.5%, which is around £108.00 a month in pension contributions.
If this member went on to work half-time they would still pay a contribution rate of 6.5%, that’s because the full-time rate for their job is still £20,000, but their contributions would be based on their part-time earnings of £10,000, which is around £54 a month in pension contributions.
Therefore, working part-time will reduce the amount of contributions the member pays.
Example 2 – Effect on Membership
The member has worked full-time for 20 years and therefore will have 20 years to count towards the calculation of benefits.
If this member went on to work part-time (50% of whole time) for the next 10 years, the member would have 20 years at full-time and 10 years at part-time. The 10 years at part-time counts at 50% of the full time rate (18.5 hours / 37 hours) = 5 years.
Total membership used in calculation = 25 years (20 years full time plus 5 years part-time)
Had the member remained full time their Total Membership would have been 30 years.
Therefore, working part-time will reduce the total membership achievable at retirement.
Example 3 – Effect on Pensionable Pay
The calculation to determine whole time Pensionable pay to use in calculation of benefits is
Actual pensionable pay / part time hours x full time equivalent hours of post
By reducing their contractual hours to 50% of whole time the member now takes home £10,000 per year.
£10,000/18.50 x 37 = £20,000 (whole time pensionable pay used in calculation of benefits)
So whilst the membership has been reduced to reflect part-time hours, the pay used in the calculation has been uprated to what this member would have earned had they been working full-time. Benefits are calculated using full-time equivalent pay to avoid the effect fluctuations in hours would have membership already built up.
If this didn’t apply the member whose take home pay has gone from £20,000 to £10,000 would find that their total membership of 25 years was calculated using their final pay of £10,000. This would be most unfair as they would lose out on the 20 years that they paid contributions for at a full-time rate.
Therefore, all membership built up prior to the reduction in hours is fully protected by using the whole-time equivalent pay in the calculation of benefits.
Warnings
- As mentioned earlier most employers in the pension fund regard part-time as working less than 30 hours per week. Therefore if you are currently full time and reduce your hours but still work 30 hours per week or more you are not classed as part-time. The effect of such a reduction in hours would be to devalue all of your earlier benefits as the actual pay you received would be used in the calculation of benefits. Please contact your employer if you need to know how they classify members as part-time.
- A change in contractual hours that also coincides with a change in the hourly rate of pay will affect the value of benefits built up before the change. An increase in hourly rate will increase benefits and a decrease will reduce the value of benefits built up. Please contact SYPA if you would like more information about this.
- The example shows the effect of a member reducing their hours. An example of a member increasing their hours has not been shown but the reverse would generally apply.