Yes it does. I think more space should have been designed into the crease so the pencil would fit just a little bit better when closing the case. It works but requires you to adjust the top of the case as you bring it down. It is still better than keeping the pencil in a separate cover. It would be easy to misplace the pencil. Overall, I recommend this case because it is very sturdy, the keyboard is charged along with the iPad, and the keyboard is very nice to use.