Calculation of Pension Payments

Private and government employers sometimes offer retirement incentives to move highly compensated senior employees into retirement and off the payroll. Some retirement incentive plans are designed to help employers identify their staffing needs. By rewarding employees who commit to a retirement date, the employer can plan ahead for its upcoming staffing needs.

Recently, a Pennsylvania school district offered its teachers a $10,000 bonus plus a 3.5% salary increase in the three years prior to their retirement. To qualify for the additional compensation, the teachers simply had to give notice of their retirement a full three years prior to their intended retirement date.

When the teachers retired, their monthly pension payments were calculated based on their salaries. But the pension plan administrator refused to include the $10,000 payments or the 3.5% salary increases as part of their “salary” in calculating their monthly pension payments. The plan administrator decided that the $10,000 payments and the salary increases were more like “severance pay” than regular pay and were thus not part of the regular salary used in the pension payment calculation.

The teachers sued the pension plan and lost, with the court upholding the plan administrator’s conclusions. Many pensions are calculated based on the final several years’ salary of the employee. But each plan differs-the definition of salary may or may not include bonuses, overtime, and other extra compensation.

All employees are entitled to a complete copy of their pension plan documents. All plans also offer a “summary plan description” that is a shorter and more readable version of the comprehensive plan document. Prior to retirement, it is wise for pensioners to work directly with their employers and plan administrators to understand the precise method of calculation of their expected monthly pension benefit.