Assumed Pensionable Pay

What is Assumed Pensionable Pay?

Assumed Pensionable Pay (APP) replaces the concept of notional pay in cases of reduced contractual pay or nil pay as a result of: 

  • Sickness or injury;
  • Relevant child related leave (i.e. ordinary maternity, paternity or adoption leave and any paid additional maternity, paternity or adoption leave)
  • Reserve Forces Service Leave.

Example 1 – Calculating APP

APP is calculated as an annual rate then applied to the relevant period as a proportion of that rate.

For monthly paid employees APP is calculated using the average of the member’s pensionable pay for the 3 complete months prior to the Relevant Event after removing any pensionable lump sum and overtime payments.

The Relevant Event

The Relevant Event is the date on which the employee drops to reduced contractual pay or nil pay due to sickness or injury, or commences child related leave (i.e. ordinary maternity, paternity or adoption leave or paid shared parental leave), or the date the member commenced reserve forces service leave.

The annual rate of APP is calculated as follows:

A monthly paid employee has received the following pensionable pay in the three complete months prior to the Relevant Event.

Month 1 £1,400,

Month 2 £2,500 (including a £1,000 regular bonus and £100 overtime)

Month 3 £1,400

The calculation of APP is as follows:

Annual rate of APP = (£1,400 + £1,500 + £1,400)/3 X 12) = £17,200

Note that the £1,000 bonus and £100 overtime payment is removed prior to the averaging and grossing up calculation. This is because the £1,000 bonus and £100 overtime have already beenincluded in the Cumulative Pensionable Pay (CPP) prior to going onto APP and so it would be inappropriate to include it again in the calculation of APP as to do so would result in double counting.

APP may be increased at the time of calculation where the employer, at their sole discretion, decides to add back into the APP any regular lump sum payment paid in the last 12 months before the relevant event. The employer must determine, at the point APP commences, whether there is a ‘reasonable expectation’ that a regular lump sum payment received in the previous 12 months would be paid again during the period where APP applies and, if so, whether that lump sum already paid should be added back into the APP annual rate figure.

Ill-Health Retirement and Death in Service APP

APP will need to be calculated when an employer terminates an active member’s employment on the grounds of: 

  • Permanent ill-health with a Tier 1 or Tier 2
  • Death in Service of an active scheme member
  • or where a Tier 3 ill health pension is awarded which is subsequently uplifted to a Tier 2 ill health pension.

The APP figure is calculated in the normal way but using the average of the pensionable pay for the 12 (weekly) or 3 (monthly) complete pay periods prior to the date of termination / death (including any APP credited in and relating to those pay periods), to which any regular lump sums paid in the 12 months prior to the date or retirement / death which the employer determines there is a 'reasonable expectation' would again have been paid to the member are added back into the annual rate of APP.

Example:

A member retires on ill-health Tier 1 on 20 November 2019. Their monthly salary was £1,958.33 increasing to £2,050 from 1 September 2019. Their APP is calculated as follows:

Relevant Event

20 November 2016

August 2019

£1,958.33

September 2019

£2,050.00

October 2019

£2,050.00

Total

£6,058.33

£6058.33 / 3 X12 = £24,233.32

The annual APP figure is used to calculate the ill-health enhancement (under tier 1 or tier 2 and the Death Grant payable (which is 3 times the annual APP) plus the enhancement attached to the Dependants pension (if applicable).

Ill-health Retirement Tier 1

Full enhancement to member's NPA based on the annual APP figure

Ill-health Retirement Tier 2

Enhancement based on 25% of the period from member's date of leaving to NPA based on the annual APP figure

Death in Service

Tax-free Death Grant equal to three times the member's annual APP at date of Death