UK: The Identification Of Pensionable Pay

Last Updated: 9 February 2012
Article by Clive Weber

It seems surprising that issues still arise over what part of an employee's earnings are pensionable. However the recent Court of Appeal case discussed below, highlights why it is vital that schemes clearly define this term. Carefully defining what part of a member's income is pensionable creates certainty and clarity for the members, the employer and their advisers. In addition this ensures that pension calculations are consistent and that all members are treated fairly.

Singapore Airlines & Anor v Buck Consultants Ltd (13 December 2011)

Singapore Airlines (SA) brought a claim for negligence against Buck Consultants. The claim was in response to the work undertaken in updating the Singapore Airlines Pension and Life Assurance Scheme (the "Scheme") trust deed and rules in 2000.

The issue arose over the definition of "Earnings" which SA claimed had been wrongly amended resulting in additional payments to employees being classed as pensionable. This substantially increased the Scheme's liabilities. The preliminary issue was whether the 1981 Rules had already rendered these payments pensionable. The definition of "Earnings" was split into 3 limbs and the following three issues arose:

1. Did the 1981 Rules include fluctuating emoluments?

SA argued for the narrowest definition of "Earnings" pointing at the use of the word "means" in limb 1 as indicating an exhaustive definition. Buck challenged this view and stated that Earnings are defined as meaning "for each Member" and thus applies to the basic remuneration of all members and that the additional provisions in limbs 2 and 3 apply only to members who fall within them. The court decided that limb 1 sets out the lowest common denominator and every member's basic remuneration counted as "Earnings". The further limbs allow for additional elements of remuneration to be included as "Earnings" such as fluctuating emoluments.

2. Are certain payments fluctuating emoluments OR basic remuneration?

This issue involved the additional payment of the London Weighting Allowance and the thirteen month payments which some members were entitled to. The Court decided these payments were contractual entitlements and therefore they should be considered as falling under limb 1 as "basic remuneration". As stated by Sir Mark Potter, this is the type of remuneration that employees receive "come rain or shine".

3. Are there any limitations on what could constitute fluctuating emoluments?

This issue relates to taxable benefits in kind received by employees, such as entertainment allowances. SA argued that benefits in kind could not be classed as fluctuating emoluments because the rules offered no mechanism for their valuation. The Court held that taxable benefits in kind were a form of fluctuating emolument and stated that under tax law (Schedule E) the meaning of "emolument" includes non-cash benefits. The lack of valuation machinery was not deemed decisive as the Scheme had to work within the framework of the Revenue's rules.

SA's appeal was dismissed on all three points.


Looking to the future, we know that contributions to be paid under the new auto-enrolment requirements will be based on a set percentage of all eligible workers' "Qualifying Earnings".

Auto-enrolment is designed to target low to moderate earners who are not saving sufficiently for their retirement. With this in mind auto-enrolment has been designed so that a worker's Qualifying Earnings will determine whether that worker is auto-enrolled into a qualifying arrangement and whether their employer is required to pay contributions in respect of them.

Employers will also have to assess whether their existing pension arrangement is a "Qualifying Scheme". Certification of an existing arrangement as a "qualifying scheme" will alleviate employers of the cost and inconvenience of setting up a new arrangement or enrolling worker's into NEST. Certification can be achieved only if the employer's existing arrangement pays a minimum of a total of 8% of contributions of workers' Qualifying Earnings.

It is therefore vital for employers to be able to clearly identify which part of their workers' overall income is classified as the worker's Qualifying Earnings.

Qualifying Earnings is defined under the Pensions Act 2008 as comprising a band of gross earnings between £5,035 and £33,540 (the "QEB") (in 2006/07 terms). Gross earnings include salary, wages, commission, bonuses, overtime, statutory sick pay, statutory maternity and paternity pay and statutory adoption pay. The Department for Work and Pensions has confirmed that in its view, tips paid in cash or by a special arrangement used to distribute tips, gratuities and service charges (a 'tronc') do not form part of a person's qualifying earnings. The issue of whether a section of income is part of a worker's gross earnings as defined or is a fluctuating emolument outside the definition of gross earnings may still arise, and the comments of the Court Appeal in the Singapore Airlines case mentioned above may be useful in determining such questions.

The DWP issued a consultation in December 2011, which ended on 26 January 2012, to address the various limits and thresholds associated with auto-enrolment including:

  • a proposal that the trigger for auto-enrolment should be set at a higher level than the lower limit of the QEB;
  • uprating limits - it is necessary for the figures in Pensions Act 2008, which relate to the 2006/07 financial year to be uprated. Originally these figures were based on the primary earnings threshold and the upper earnings limit for National Insurance Contributions. The upper limit of the QEB has since been uprated in line with the rise in average earnings (meaning it would now be £39,853), however the DWP are considering whether this remains an appropriate measure by which to uprate the upper limit of the QEB.

The DWP's response to the consultation is awaited and any changes which are implemented could affect the number of workers subject to auto-enrolment. Regardless of the auto-enrolment changes, the complicated nature of identifying workers' pensionable income remains a key issue for employers and trustees, and is an issue which is unlikely to go away in the near future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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