Exit payment cap consultation update- respond to consultation

Last month we let you know that HM Treasury had published the long awaited Government response to the consultation on restricting exit payments in the public sector to £95,000. This was followed by the draft regulations for capping public sector exit payments. You can read the newspost for more information. 

On 7th September the Ministry of Housing, Communities and Local Government (MHCLG) published it's consultation looking for views on proposals for reforming exit payment terms for local government workers.

The consultation will close on 9 November 2020. We encourage employers, covered by the proposed changes,  to read and respond to the consultation.

It's understood that employers to be covered by the exit pay requirements, are those listed in the draft regulations as "employers". This means that the new pension options will apply generally only to members of public sector bodies, but please note they will apply regardless of whether the individual is capped or not. 

We've put together some highlights from the consultation document:

Exit payments will be restricted as follows;

a) A maximum tariff for calculating exit payments of three weeks’ pay per year of service. Employers could apply tariff rates below these limits.

b) A maximum of 15 months (66 weeks) salary that can be paid as a redundancy compensation payment. It will be up to employers whether to apply lower limits, as they can currently under the 2006 Regulations.

c) A maximum salary of £80,000 on which a redundancy compensation payment can be based, to be reviewed on an annual basis using an appropriate mechanism, for example: CPI (Consumer Price Index).

For members of the LGPS made redundant who are at least 55 years old, they propose the benefits and the associated strain cost due from the employer should be limited as follows:

• The strain cost cannot exceed the overall cap of £95,000
• The strain cost (so therefore the benefit) will be further reduced by the value of any Statutory Redundancy Payment required to be paid (which the employee will still receive as a cash payment)
• A further reduction would be made to reflect any voluntary payments made to cover grant of additional pension under regulation 31 of the LGPS Regulations 2013
• Any reduction in the strain cost (reduced benefit) due to the above limitations may be made up by the worker from his own resources
• The member will receive an actuarially adjusted pension benefit in line with the revised strain cost under these provisions.

This is a proposed huge change to the current LGPS regulations and the issues for funds and employers will be wide-ranging. To date the draft LGPS regulation changes that will be required have not been published. They'll affect governance arrangements, retirement processes, calculations, and communications with employees. Your policies will need to be updated to ensure that severance packages are being dealt correctly. Processes for carrying out retirement estimates and final quotations will need to be updated. Employers will need to provide the fund with details of statutory and discretionary redundancy payments, for members over age 55 in the scheme, so that retirement calculations can be performed.  

The new arrangements are planned to come into effect on 1 January 2020.  We've had to suspend giving redundancy quotations for proposed redundancies after 1 January 2020 until the outcome of the consultation is clearer and the effect on the LGPS calculations are known.

We'll keep you up-to-date with any more news, but if you'd like to discuss how these changes impact your organisation please email pensions@shropshire.gov.uk