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Do the holiday pay decisions on overtime affect your pension scheme?

Potentially yes.

The decision in Wood and others v Hertel and Fulton and Bear Scotland Limited found that overtime payments an employee is obliged to accept if offered (known as non-guaranteed overtime) MUST be included when calculating holiday pay. 

If your organisation’s pension scheme rules provide that all of a member's pay is pensionable and the calculation of their holiday pay did not take account of non-contractual overtime, their pensionable pay may be lower than it should have been. 

Even a definition of pensionable pay which is based on basic pay only could lead to member challenge, depending on how basic pay has been interpreted in practice. For example, some definitions of basic pay can include overtime as a component of pay. 

If you offer any of the following schemes, there may be significant risks that you should consider:

  • Defined contribution schemes

    In a defined contribution scheme, members could potentially bring claims for backdated employer contributions.

    Whilst this remains a risk, it is arguable that the member should also pay backdated contributions (as both they and their employer will have underpaid contributions to the scheme).
  • Defined benefit schemes

    In a defined benefit scheme, member challenges might also arise in relation to the incorrect calculation of their pension benefits where overtime falls within the definition of pensionable salary and has not been included in holiday pay.
  • Death in service lump sums

    Another potential area for challenge relates to the calculation of a member's death in service lump sum where overtime forms part of basic salary and has not been included in holiday pay. 
  • Auto-enrolment scheme

    An employer’s contributions are based qualifying earnings under the Regulations. All overtime counts towards qualifying earnings. 
Next steps: 

If you operate any of the above schemes we recommend that you take the following steps: 

  1. Determine how holiday pay and pensionable pay has been calculated. 
  2. Consider whether this practice accords with the current law and the definition of pensionable pay under their scheme rules.
  3. Where appropriate, a deed of amendment might be required.