New regulations in place from 4 November 2020 that CAP public sector exit payments at £95k, and update on further reforms
Background
On 10 April 2019, HM Treasury (HMT) opened a consultation on draft regulations, directions and guidance to bring in a £95k exit payment cap on public sector exit payments. This included provisions about the circumstances in which, and by whom, the cap could be waived. The consultation closed on 3 July 2019.
On 21 July 2020, HMT published the Government response to the consultation and the ‘The Restriction of Public Sector Exit Payments Regulations 2020’, became law on 4 November 2020.
Who is affected?
The £95k cap on exit payments only applies to employees exiting an employer listed in the new regulations. You need to check if the exit cap regulations apply to you as an employer. You can do this by looking at the Schedule at the end of The Restriction of Public Sector Exit Payments Regulations 2020. If your ‘employer type’ is listed here, then the exit cap regulations will apply to your organisation.
If I’m an employer listed in the regulations affected by the cap, what do I need to do?
We strongly recommend you read the Local Government Association's (LGA) Exit Cap information for employers document. It provides a step-by-step guide to what you need to do for redundancy and business efficiency exits that occur from the 4 November 2020, for members over age 55 and until the LGPS regulations are changed.
If the exit cap regulations apply, you need to check the total value of the exit payments you'd normally make to, or because of, an employee that is leaving your employment. For a list of exit payments covered by the exit cap, see regulation 5 of the exit cap regulations. If the total exit payment is over £95,000 when the pension strain, statutory redundancy payment and any other payments you are obliged to make are added together, there is a conflict between the exit cap regulations and the LGPS regulations. The LGPS regulations still require the member to take payment of an unreduced pension, but the exit cap regulations prevent the employer from paying the full strain cost to pay for this.
What happens if an employees total value of exit payments exceed the £95k cap?
Before the cap was introduced on the 4 November 2020, the LGPS pension is normally payable immediately without reduction to a scheme member aged 55 or over who is being made redundant or leaving on efficiency grounds. Now the cap is law and if an employee is exiting your employment and the total value of the exit payments exceeds the cap, the Fund has decided that, until the LGPS regulations are amended, it will only offer the member an actuarially reduced pension or an award a deferred pension payable from normal retirement age.
What happens if an employees total value of exit payments is less than or equal to £95,000?
If the total of the exit payments is less than or equal to £95,000, then the exit should be processed as normal until the LGPS regulations are changed. The pension is payable immediately without reduction for early payment in line with the current LGPS regulations. Your normal process for meeting the strain cost continues to apply.
Important - do you have any ongoing or upcoming exits for your employees?
Please note we are informing all scheme members who contact the pensions team for a redundancy quotation to speak to you, their employer, if they think they could be affected as we will not know the total value of the exit payments being made to the employee. It is for you, as the employer, to check if the total value of exit payments exceed the Cap or not, therefore if you are aware of upcoming cases you must contact the pensions team directly to discuss them.
Where can I find more information?
Following the introduction of the exit payment regulations, HM Treasury (HMT) and LGA have published the following documents which you may wish to read to find out more:
The Restriction of Public Sector Exit Payments Regulations 2020
Exit Cap information for employers document
Position statement for local authority employers. (The statement looks at the impact of the exit payment regulations, direction and guidance. As the situation keeps changing, you must make sure to keep checking your latest position and seek legal advice where required)
Further reform of exit payments in local government
Background
On 7 September 2020, the Ministry of Housing, Communities and Local Government (MHCLG) published a consultation on restricting exit payments in local government in England and Wales. This consultation has wider implications than the £95k cap and draft regulations have been published as part of the consultation.
Who is affected?
These proposals affect local government workers and may not just apply to the employers affected by the £95k cap.
What is being proposed?
They propose to change the automatic entitlement to unreduced pension benefits for those over age 55 who leave the scheme at your request for reasons such as redundancy/efficiency. The exit payment reform consultation closed for responses on 9 November 2020.
The proposed changes to the LGPS regulations are to allow for the introduction of the £95k exit payment cap and a change to the current position of all members receiving an unreduced pension if made redundant over the age of 55. The proposals also limit severance payments and reduce any LGPS pension due immediately by the value of any statutory redundancy payment.
The amendments to the LGPS regulations are not in place currently and are not expected until early 2021, but as stated above the 95k cap is now in place from 4 November 2020.
Please note, in the period between 4 November 2020 and the date the LGPS regulations are amended
- only exits, from employers covered by the regulations, where the cost to the employer exceeds the £95k cap, will be impacted
- the proposals in the MHCLG consultation around limiting cash severance payments and the strain cost having to be reduced by the value of any statutory redundancy pay (reducing the pension that is payable) will not apply.