The legislation implementing the £95k cap on exit payments has now been signed and comes into force on 4 November 2020. This means that there will be a limit on the amount of costs for early retirement due to redundancy.
The Ministry of Housing, Communities & Local Government (MHCLG) have opened a consultation seeking views on proposals for further reforming exit payment terms (see below). The consultation proposes changes to the Local Government Pension Scheme (LGPS) regulations in order to accommodate the £95k exit payment cap. It also proposes a limit on cash severance payments and for the strain cost to be reduced by the value of any statutory redundancy payment made.
The amendments to the LGPS will not be in place when the £95k cap comes into force. HM Treasury (HMT) and MHCLG have been made aware of the predicament this puts local government employers and LGPS administering authorities in.
Please note, in the period between 4 November and the date the LGPS regulations are amended:
- only exits where the cost exceeds the £95k cap will be impacted
- the statutory guidance on standard strain cost will not be effective i.e. you will continue to calculate strain cost on a local basis
- the proposals in the MHCLG consultation around limiting cash severance payments and the strain cost being reduced by the value of any statutory redundancy pay will not apply
The government first announced plans to cap exit payments in the public sector in 2015.
MHCLG consultation on further reform of exit payments
In addition to the £95k exit payment cap MHCLG has launched a consultation on changes to the Local Government Pension Scheme (LGPS) and Discretionary Compensation Regulations. The consultation covers the required changes to compensation and pension regulations to implement both the £95K exit payment cap and the public sector exit payments further reform proposals issued by HMT in 2016.
Who is covered?
Employees of all local authorities are covered by both the cap and compensation regulations, so employees will see a range of limitations to scheme redundancy benefits. There will also be LGPS scheme employers who are not covered by either the cap or compensation regulations where employees will see different outcomes.
HMT regulations set out the bodies covered by the £95k cap – ‘capped employers’ – while revised compensation regulations (as yet unpublished) will set out the bodies covered by the further reform changes – ‘reform employers’. Some scheme employers will be both capped and reform employers but others will fall into one or neither camp. Due to the timing of the HMT regulations there will be a period from 4th November when employers are covered by the cap but not yet by the revised compensation or pension regulations.
What is covered by the further reform proposals in the MHCLG consultation?
These proposals will limit the payments made to, or in relation to, employees of ‘reform employers’ in addition to statutory entitlement as follows:
- The actual pay used in severance calculations will be limited to £80,000;
- The maximum severance (including statutory redundancy pay) will be limited to 3 weeks’ pay per year of service or 15 months’ pay, whichever is the lower
- No severance will be payable if the member receives an immediate pension with a payment by the employer to cover the cost of early release of pension – the strain cost – except in the case of the severance amount exceeding the strain cost in which case the excess would be payable
- The amount available for any strain cost will be reduced by the statutory redundancy payment
What is covered by the exit cap?
The exit payment cap is set at a total of £95,000 which will not be index-linked. Exit payments include
- redundancy payments (including statutory redundancy payments)
- severance payments
- pension strain costs that arise when an LGPS pension is paid unreduced before a member’s normal pension age, and
- other payments made as a result of termination of employment.
The cap applies to all exit payments that arise within 28-days of termination.
What is not covered?
Payments related to death in service or ill health retirement, pay in lieu of holiday, payments complying with an order made by a court or tribunal and payments in lieu of notice that do not exceed a quarter of a person’s salary are not exit payments for the purposes of these regulations.
Although statutory redundancy is included as an exit payment it cannot be reduced. If the cap is exceeded, other elements that make up the exit payment must be reduced to achieve an exit payment of £95,000 or less.
Will the cap be indexed?
Proposals for the cap were first published in 2015. If the cap had been indexed by CPI since then it would now be more than £110,000. There is however no intention to index the cap although the response states that this will be kept under review.
When will the cap come into force?
The cap will come into force 4 November 2020. It is understood that MHCLG changes to LGPS and Compensation regulations will not come into force before the end of the calendar year.
Applying the cap and further reform in the LGPS
The major impact of the regulations will be on LGPS members aged 55 or over who currently qualify for an unreduced pension because of redundancy or efficiency retirement as well as a severance payment under The Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2006.
Once both the cap and further reform is in place for members whose employers are both capped and subject to further reform the effect of the proposals will be significant as they would receive statutory redundancy pay and one of the following options:
- An immediate actuarially reduced pension calculated using a strain cost reduced by the amount of the statutory redundancy payment and capped at £95k. In this case no severance is payable; or,
- An immediate fully reduced pension (no strain cost to the employer), plus statutory redundancy pay plus severance in excess of statutory redundancy limited to £95k, or,
- A deferred pension (no strain cost to the employer), plus statutory redundancy pay plus severance in excess of statutory redundancy limited to £95k.
However in the period between 4th November and prior to revised pension and compensation regulations being in place the only change will be the application of the cap to strain costs.
Relaxing the cap
There are circumstances, as set out in draft HMT Directions, when the cap must be or may be relaxed by a minister or the authority. Consent for a waiver will come from Welsh Government.
Employee and employer responsibilities
A person who receives an exit payment must inform any other public body covered by the regulations that employs them about that payment. An employer must ensure that any exit payment does not exceed the cap (unless permitted by the relaxation directions) and, where a non-compliant payment is made, recover any overpayment subject to a value for money assessment.