Steph Rutt

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set out the bodies covered by the £95k cap – ‘capped employers’ – while revised compensation regulations (as yet unpublished) will set out the bodies covered by the further reform changes – ‘reform employers’.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.

What is the McCloud case about?

When the Government reformed public service pension schemes in 2014 and 2015 they introduced protections for older members. In December 2018, the Court of Appeal ruled that younger members of the Judges’ and Firefighters’ Pension schemes have been discriminated against because the protections do not apply to them.

The Government has confirmed that there will be changes to all main public sector schemes, including the LGPS, to remove this age discrimination. This ruling is often called the ‘McCloud judgment’ after a member of the Judges’ Pension Scheme involved in the case.

What does it mean for the LGPS?

When the LGPS changed from a final salary to a career average pension scheme in 2014, members who were within 10 years of their Normal Pension Age (usually age 65) on 1 April 2012 were provided with a protection called the ‘underpin’. When a protected member takes their pension, the benefits payable under the career average and final salary schemes are compared and the higher amount is paid.

The Government will need to provide younger members with a protection equal to the underpin protection provided to older members in order to remove the discrimination. It is currently consulting on the changes that need to be made to do this.

Will the changes apply to me?

The Government intend for the changes to apply to members who were in service on 31 March 2012 and also have service after 31 March 2014 (without a break of more than five years).

If you left the scheme before 1 April 2014 you built up benefits in the final salary scheme only. These changes will not affect your pension.

Will my pension increase?

Most members are unlikely to see an increase to their pension, and where an increase is applied, it is likely to be small. This is because most members will build up a higher pension in the career average pension scheme than they would have under the final salary scheme.

When would any changes come into effect?

We do not expect any changes to be introduced before April 2022.

What do I need to do?

You do not need to take any action. The Government has confirmed that members who qualify for protection do not need to make a claim for the changes to apply to them.

I have already left the LGPS, will the changes apply to me?

If you qualify for protection and have membership in the LGPS after 31 March 2014 the changes will apply to you, even if you have left the scheme. I have taken payment of my LGPS pension, will the changes apply to me?
If you qualify for protection and have membership in the LGPS after 31 March 2014 the changes will apply to you, even if you are receiving your pension from the LGPS.

Swansea Council’s award-winning pension fund has taken another big step in its work towards becoming one of the greenest funds of its kind in the UK.

The £2.1bn fund has already taken major steps to reduce its carbon footprint by cutting the amount of cash invested in oil companies and other organisations with a high carbon density.

Now it’s agreed a £30m investment in green energy production companies around the world.

Working with investment firm BlackRock, the fund is investing in a range of solar and wind power infrastructure projects that aim to deliver long-term benefits for the fund and climate change.

Clive Lloyd, chair of the Swansea pension fund committee, said: “This decision is an investment not only in the future of our pension fund but also in the future of our planet.

 “We were the first local government pension scheme in Wales – and among only a small number in the world – to commission a review of our equity investment portfolio to find out the exact extent of our carbon and fossil fuel related investments.

“Since then we have moved £0.5bn of assets into low carbon index tracking funds which has reduced further what was already a low level of investments in carbon-related industries. 

“This latest step is part of an on-going effort to gain attractive returns for pensioners, reduce our carbon footprint and support climate-friendly energy production.”

The Swansea fund – which Swansea Council manages for Swansea, Neath Port Talbot as well as a number of other employers in the area – has already been recognised at the LAPF Investments Awards, which celebrate outstanding achievement by pension funds and service providers.

Swansea won the award for the fund with the Best Approach to Sustainable Investment in the UK.

Cllr Lloyd added: “Last year we passed a motion in Swansea declaring a Climate Emergency and we urged the UK government to do the same.

“We are making decisions and taking practical steps every day that are making a real difference but we know we can and we will do more. We are determined to make Swansea the most green and energy efficient council in Wales.”

I am concerned about my financial situation because of the COVID-19 – what can I do?

The Money Advice Service has published guidance on how to deal with the financial effects that you may be suffering due to the coronavirus pandemic. It covers all aspects of your finances including problems with paying mortgage and rent payments, debt and claiming benefits.

Can I stop my pension contributions?

Yes, but you might want to consider joining the 50/50 section of the LGPS instead of opting out. If you do, you’ll pay half your normal contribution rate and build up half your normal pension. You will retain full life and ill health cover and you can move back to the main section whenever you are ready.

You can use the contributions calculator to check what difference this would make to your take home pay.

If after considering the 50/50 section you decide you would like to opt out, you can obtain an opt out form by contacting the City & County of Swansea Pension Fund.  You should take independent financial advice before deciding to opt out.

The coronavirus pandemic is affecting stock markets, will this affect the value of my LGPS pension?  

No, the LGPS is a defined benefit pension scheme which means your pension is based on your salary and how long you’ve paid in. Your pension is not linked to stock market performance, so both your contributions and your pension, whether in payment or not, will be unaffected.

The only exception to this is Additional Voluntary Contributions (AVCs). If you have an AVC, it is possible the value may have reduced – this will depend on the funds you have chosen to invest in. You should contact your AVC provider for more information about this.

I am receiving a pension from the LGPS, will my pension still be paid to me? 

Yes, the City & County of Swansea Pension Fund will prioritise paying pensions during these uncertain times.

If my pay is reduced, what impact will this have on my pension?

This will depend on the reason for the reduction:

–       Sick leave

If your pay is reduced or you receive no pay because you are off work due to sickness or injury, your pension builds up as if you were at work receiving normal pay.

You will continue to pay contributions on any pay you receive during your sick leave.

–       Authorised unpaid leave

If your employer allows or requires you to take a period of unpaid leave, you will not build up any pension for the period unless you choose to pay Additional Pension Contributions (APCs) to purchase the amount of pension lost.

If you choose to pay APCs to purchase the amount of pension lost and you make your election to do this within 30 days of returning to work, the cost will be split between you and your employer.

You can find more information, use an online calculator and download an application form from the LGPS member website.

–       Coronavirus job retention scheme leave

The Government has confirmed that they do not expect public sector organisations, such as councils, to use the coronavirus job retention scheme, except in some very limited cases. Public sector employers should continue to pay staff in the normal way even if they are not at work.

If your employer is able to use the job retention scheme and you both agree, your employer might be able to keep you on the payroll if they’re unable to operate or have no work for you to do because of coronavirus (COVID-19). This is known as being ‘on furlough’.  

If this applies to you, your employer could pay 80% of your wages up to a monthly cap of £2,500. The Government will fund your employer to do this. Employers can choose to top up your pay to 100%, but if you receive less pay when you are ‘on furlough’, the amount of pension you build up during this period will also be reduced. You will continue to pay pension contributions on the pay you receive.

You can pay Additional Pension Contributions (APCs) to buy extra pension to make up for the pension lost during this period. Your employer does not have to pay towards the cost, but they can choose to.  

You can find more information about paying APCs, use an online calculator and download an application form from the LGPS member website.

The GOV.UK website provides more information on the job retention scheme for employees.

–       Emergency Volunteering Leave (EVL)

The Government has introduced a new volunteering scheme to allow the public to contribute to the coronavirus response. The scheme allows workers to take unpaid statutory emergency volunteering leave to volunteer in health and social care authorities.

If you take a period of EVL, your LGPS pension benefits will build up in the same way as if you were working normally.

You will only pay contributions on any actual pay your employer pays you during the period.

–       Other reasons

For information about the impact on your pension if you are away from work for any other reason, such as child related leave or reserve forces leave, see the LGPS member website.

How will coronavirus (COVID-19) affect the service provided by the City & County of Swansea Pension Fund

The City & County of Swansea Pension Fund have already adapted their working patterns to ensure they can continue providing a service whilst monitoring the latest Government advice to protect their staff.

They will prioritise paying pensions and processing death benefits, so it may take longer than normal to deal with other work, such as transfers, estimate requests and general queries.

See the City & County of Swansea Pension Fund website to register for the My Pension Online service. You may be able to use the self-service facility to update your details, run calculations and view your previous annual statements.

Could pension scams increase during the Coronavirus (COVID-19) outbreak?

Yes, watch out for scams related to coronavirus (COVID-19). These scams take many forms and could be about insurance policies, pensions transfers, or high-return investment opportunities, including investments in crypto assets.

Scammers are sophisticated, opportunistic and will try many things. They’re also very likely to target the vulnerable. Beware of investments that appear to be too good be true. 

To help protect yourself you should:

• reject offers that come out of the blue
• beware of adverts on social media channels and paid for/sponsored adverts online
• use the Financial Services Register and Warning List to check who you’re dealing with.
• do not click links or open emails from senders you don’t already know
• avoid being rushed or pressured into making a decision
• if a firm calls you unexpectedly, use the contact details on the Register to check that you’re dealing with the genuine firm
• not give out personal details (bank details, address, existing insurance/pensions/investment details).

If you suspect a scam, call Action Fraud straight away on 0300 123 2040.

In accordance with direction from Central Government concerning the ongoing threat of the spread of the Coronavirus Pension Section staff will be homeworking until further notice. 

While we will make every effort to continue to provide a service delivery that is fit for purpose we would ask that under the current circumstance you will be patient if there is a delay with your request/process as this is a unique situation that we as a Section are in.   

We will endeavour to speed the process of communication by sending correspondence via email and would appreciate where possible a response via the same means.

There has been a lot of disturbing news lately about the fall in stock markets and the potential resultant impact on defined contribution pensions.

LGPS defined benefit pensions are not linked to stock market performance and are set out in statute.

Although short term investment values may vary, the LGPS as a long-term investor is securely managed to address any longer term impacts.

LGPS Scheme members can therefore be assured that both their contributions and their pension, whether in payment or built up to date, will be unaffected.