What is pensionable service?
Pensionable service is the time YOU are credited with as being an active member of your pension scheme.
It is an important element of the formula that your defined benefit scheme uses in the calculation of your benefits. The formula (and the definitions for each part of it) will be set out in the Scheme Rules which will also define what period of your actual service will be classed as your pensionable service. The two most common types of defined benefits scheme, ‘final salary’ and ‘CARE schemes’ use pensionable service in their formula:
Example of a ‘final salary’ formula:
length of pensionable service x final pensionable salary
accrual rate
Example of a ‘CARE scheme’ formula:
length of pensionable service x average pensionable salary
accrual rate
Pensionable service can be credited in a wide range of ways, for example:
- exact number of days ( 6 years, 251 days)
- years and completed months (e.g. 6 years, 8 months)
- completed years only (e.g. 6 complete years)
The method used will affect the amount of benefit credited to you – see the example below.
Example:
Let’s look at life long friends, Terry and Jim, who each work for different employers. Both are members of their employer’s final salary scheme and have the same final pensionable salary, £39,000, and both have worked exactly the same length of time and have 32 years, 361 days pensionable service in their respective schemes. Each pension scheme has an accrual rate of 1/60th (an accrual rate is another part of the formula used by a final salary scheme in calculating pension benefits).
The Rules of Terry’s pension scheme state that pensionable service is ‘years and days completed’ so every day he completes counts towards his pension benefit (like most Public Sector pension schemes). The Rules of Jim’s pension scheme state that pensionable service is ‘whole years completed’.
If they retired today, their respective pensions would be:
Terry,
Pensionable Service, 32 years 361 days
Final Pensionable Salary, £39,000
‘Accrual rate’, 1/60th
Pension: 32.99 years x £39,000
60
= £21,443 p.a.
Jim,
Pensionable Service, 32 years
Final Pensionable Salary, £39,000
‘Accrual rate’, 1/60th
Pension: 32 years x £39,000
60
= £20,800 p.a.
You can see from this example that if Jim works just another 4 days he would get one year’s extra pension – important, if he can negotiate the extra 4 days if he is made redundant; leaves for another job; or is about to draw his pension (whether at Normal Retirement Age, or through early payment or ill health).
That’s how important knowing HOW your pension scheme works – and it doesn’t have to be difficult to understand.
In some situations, your pensionable service could be more than your actual service of employment if for example you have transferred benefits from an earlier scheme with another employer or if your purchased ‘added years’ in your scheme.
Your pensionable service may exclude extended periods of leave, for example.
What is a waiting period?
Your pensionable service will not necessarily be the full period of your employment as you may have commenced work before you were eligible to join the pension scheme.
You may have been required to work for your employer, for example, for a specified period before you were eligible to join the pension scheme (e.g. 12 months). This approach is often used by employers with defined benefit schemes where in the past there has been a high turnover of staff during the first few months of service.
During the waiting period, you would not usually have been eligible for any of the benefits offered by the pension scheme to its members (such as dependants’ pensions). However, you may have enjoyed death-in-service protection in the intervening period.
An employer may sometimes waive a waiting period for a key employee.
Summary
People seldom have identical pensions and you should avoid drawing comparisons with colleagues whose circumstances may at first appear the same but could emerge as having significant differences.
This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser.
What counts towards pensionable service v3.0 Active
Last updated 18/01/2007
