The State Employees' Retirement Board's 122-page opinion, made public Friday, determined Sandusky remained a Penn State employee after his announced retirement in 1999, meaning his abuse of children fell under a 2004 state law that added sexual offences against students to the crimes that trigger forfeiture.
Sandusky attorney Chuck Benjamin said he planned to file a challenge to the decision in court.
"All I can say at this point is we're looking forward to litigating the revocation of the pension in court," Benjamin said. "That's the next step of this process. We've exhausted our administrative remedies, and now we'll be filing papers within the next 30 days in court."
The decision went against the recommendation in June by a hearing examiner who said Sandusky had already retired by the time the Pension Forfeiture Act was expanded. Six sex crimes against two children met standards of the forfeiture law, the board said.
"He knew that his pension was conditioned on not performing certain conduct," the opinion said. "He elected to engage in that conduct."
Sandusky, 70, is serving a decades-long sentence and appears likely to die in prison. His wife, Dottie, would have been in line to continue collecting 50 per cent of his pension upon his death, but the opinion also denied her survivorship benefits.
The board said Sandusky, through his former charity the Second Mile, continued to work in an outreach capacity for Penn State after 2004, appearing at golf tournaments that university alumni, boosters and athletics officials attended.
Sandusky "continued to attend athletic events at Penn State, including football games in the Penn State suite designed to attract and solicit donors," the board wrote. It also said he had access to facilities, free tickets to events, an office and a free phone, highlighting a 1999 "letter agreement" with the university that the board said was unique.
"The nature of the work performed by (Sandusky) established an employment relationship," the board concluded. "The parties expressly agreed and understood that (Sandusky's) efforts were directed towards increasing the visibility and enhancing the reputation of Penn State and its athletic programs."
The hearing examiner, Michael Bangs, had said that the retirement system had improperly applied the forfeiture law to Sandusky for crimes he committed as a retiree.
Sandusky testified for nearly three hours by video link earlier this year at a hearing before Bangs regarding the forfeiture. He was the only witness called by his lawyers.
Sandusky spent decades as Penn State's defensive football coach before retiring in 1999. Penn State employees do not work for the state government but are eligible to participate in the state pension system.
Sandusky collected a $148,000 lump sum payment at the time he retired, and a total of $900,000 in pension payments by September 2012.
He was convicted by a jury in 2012 of sexual abuse of 10 boys and sentenced to 30 to 60 years.