PSI6.4.45 - Total Benefits On Retirement At Normal Retirement Age: Pensionable Remuneration and Final Remuneration - Profit Related Pay (PRP) Schemes

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

The introduction of a PRP scheme by an employer sponsoring a pension scheme may lead to a request to allow the pension scheme contributions and retirement benefits to be based on “notional/shadow pay”. In these circumstances our practice is as follows:-

1. There is no objection to the provision of benefits calculated by reference to “notional/shadow pay” (the pay the employee would otherwise have been receiving if the PRP scheme had not been introduced), so long as the benefits actually provided do not exceed Inland Revenue maxima by reference to the definitions of final remuneration as set out in the Glossary to the Practice Notes (1991). If the retirement benefits promised before the introduction of the PRP scheme were anywhere near the Inland Revenue maxima, there could be a danger of a reduction in expected benefits because final remuneration cannot include any notional element (see PSI6.4.44). We therefore expect the application of the Inland Revenue maxima to be clearly explained to affected members at the outset.
2. So long as the benefits are promised by reference to “notional/shadow pay” (subject to Inland Revenue maxima), we will not object to employee contributions also being calculated by reference to such pay provided these do not exceed 15% of actual pay for the year. Once again we expect members to be made aware of the overriding restrictions.
3. The level of funding must not exceed that required to provide the promised (or targeted) benefits which should, if necessary, be cut back by Inland Revenue limits.

Background information on how PRP schemes operate can be found on SF70/78.