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Home >  Taxation, work and welfare >  Public Service Pensions (PSP) > Public Service Pensions: glossary

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Public Service Pensions: glossary

For a more comprehensive pensions glossary, please see the Independent Public Service Pensions Commission glossary.

Accrual rate

The rate at which benefits build up for members of defined benefit schemes. It is expressed as a fraction of pensionable salary for each year (or part year) of pensionable service completed, for example 1/60th. The lower the fraction the faster the pension builds up.

Accrued rights

The benefits that a pension scheme member has already earned and is entitled to keep.

Career average scheme

A type of defined benefit scheme that builds up pension benefits each year based on the pensionable salary earned during that year. At the end of each year the slice of benefit earned is increased – typically to reflect increases in prices or earnings. When a member leaves the scheme, their total pension is calculated by adding up the slices built up (plus increases). This differs from a final salary pension scheme which only looks at the final years. 

Commutation

All schemes allow members to take lump sums up to the maximum allowed by HMRC. Under current legislation, these lump sums are tax free. On retirement, members are allowed to commute – or give up – some pension in exchange for a lump sum. These are expressed as factors, for example, a commutation factor of 12:1 means that each £1 of pension given up buys £12 of lump sum. HMRC refers to these as pension commencement lump sums.

Consumer Prices Index (CPI) – see also Retail Prices Index (RPI)

Measures of inflation. RPI differs from CPI in the basket of goods measured and CPI does not include the cost of mortgage interest payments.

Cost ceiling

Cost ceilings were set by Government to structure discussions with trades unions and scheme representatives about the new scheme designs. They were set as scheme-specific contribution rates, expressed as a proportion of pensionable pay. Trades unions and scheme representatives were invited to design the new schemes, within the cost ceilings.

Cost cap

The cap will be based on a proportion of pensionable pay that the taxpayer will contribute to employees’ pensions over the long term. It will be symmetrical so that if reductions in member cost fall below a ‘floor’, or rise above a ‘ceiling’, there will be a period of consultation with relevant groups before changes are made to bring costs within the ceiling and floor.

Defined benefit scheme

A pension scheme that pays pension benefits which are pre-determined and based on the scheme member’s pensionable pay and how long that member has been in the scheme.

Defined contribution scheme

A pension scheme that pays pension benefits which are not pre-determined. Contributions are paid into an account in the member’s name. Members are normally given a choice of funds in which to invest their account and will not know in advance how much their pension benefits will be. These will depend upon a number of factors: 

• How much is paid in 
• How well the member’s chosen investment funds perform 
• The investment manager’s charges  
• How much it costs to buy a pension at retirement  
• The type of pension the member chooses.

Employee contribution

The amount pension scheme members pay towards the cost of providing their pension benefits. Contributions members pay over and above the amount membership demands are known as Additional Voluntary Contributions.

Employer contribution

The amount the employer pays into a pension scheme. For a defined benefit pension scheme the amount will be determined by the scheme’s actuary and expressed as a percentage of pensionable pay roll. This will vary from time to time depending on the financial well being of the scheme.

Employer contributions into a defined contribution pension scheme are normally expressed as a percentage of each employee’s pensionable pay. Some employers will match the employee’s contribution (up to a certain level).

An employer has control over the amount paid into a defined contribution scheme as this is predetermined.

Final pensionable earnings

This is used in final salary pension schemes to calculate the pension benefits at retirement. The definition of final pensionable earnings is specified by the pension scheme but it is generally the member’s last 12 months’ pay or best 12 months in the last few years of service.

Final salary pension scheme

A final salary pension scheme is a type of defined benefit pension scheme. The member’s pension is worked out as a fraction of their final pensionable salary for each year of service. This is in contrast to a career average scheme where the member’s earnings throughout the year are taken into account.

Normal pension age

The minimum age specified by the pension scheme at which members are able to retire without pension benefits being reduced for early payment.

Pension benefit

The pension and lump sum paid at retirement, or to dependents in the event of the member’s death.

Pension fund

Contributions from employers and scheme members are invested and used to pay members’ benefits. This creates a pension fund, usually made up of shares and other financial products.

Most public service pension schemes (with the exception of the Local Government Pension Schemes) are not backed by a pension fund; they operate on an unfunded, pay-as-you-go basis with pensions paid from a combination of member and employer contributions and taxpayer funds.

Pension commencement lump sum (see also commutation)

At retirement, members can take a proportion of their pension benefits as a tax free cash lump sum. For some public service pension schemes this is paid automatically. Others build up pensions at a faster rate with members giving up part of their pension in return for a lump sum (see commutation).

Pensionable earnings

Pensionable earnings are used by defined benefit schemes to calculate the member’s benefits payable. They do not affect the benefits payable to a member of a defined contribution scheme. Some schemes set member and employer contributions as a percentage of pensionable earnings.

Pensionable service

The time period a pension scheme member is an active member of the pension scheme which, in a defined benefit scheme, is used in the calculation of that member’s pension benefits.

Pensioner member

A member of a pension scheme (or dependents) who is receiving pension benefit. 

Retail Prices Index (RPI) – see also Consumer Prices Index (CPI)

Measures of inflation. RPI differs from CPI in the basket of goods measured and CPI does not include the cost of mortgage interest payments.

State Pension

The basic State Pension is paid to all workers who have paid full rate National Insurance contributions for a specific period or have received contribution credits.

A State Second Pension (S2P) is also paid to some workers but S2P is not earned for any period the worker has been a member of a public service pension scheme (or similar pension scheme). More information about State Pensions can be found on the Directgov website (opens in new browser window).

State pension age

The earliest age you can get your basic State Pension and differs depending on your date of birth.

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