New regulations in place from the 4 November 2020 that CAP Public Sector Exit Payments at £95k
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. Regulations for capping public sector exit payments came into force on 4 November 2020. They are called ‘The Restriction of Public Sector Exit Payments Regulations 2020’. The £95k cap on exit payments only applies to employers listed in the new regulations.
A scheme member aged 55 or over who would, apart from these regulations now being in force, qualify for an unreduced pension under the LGPS regulations and are subject to the cap, will be offered an actuarially reduced pension or a deferred pension payable from their normal retirement age.
Reform of exit payments in local government
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. These proposals will affect all local government workers and propose to change the automatic entitlement to unreduced pension benefits for those over age 55 who leave the scheme at the request of their employer because of redundancy/efficiency. The exit payment reform consultation closes 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. 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 the 95k cap is now in force.
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.
To help explain how this could affect you, we’ve made some frequently asked questions.
Who does the exit payment cap apply to?
The cap will apply to staff working for employers listed in the Restriction of Public Sector Exit Payments Regulations 2020.
When will the exit payment cap come into force?
It came into force on the 4 November 2020.
What is the value of the exit payment cap and what payments are included?
The exit payment cap is set at £95k. This might seem a large sum, but the cap is the total of exit payments allowed, including redundancy payments severance payments, discretionary payments, pension strain costs (which happen when a pension is paid unreduced before a member's normal pension age), and other payments made when an employment ends.
Where it applies, the value of the exit payments must be limited to £95k, which is currently not in line with the LGPS regulations. It’s proposed that there'll be different options for members affected.
What is the pension strain cost and who pays it?
Under the current rules of the LGPS, your pension is normally reduced if paid before your normal pension age (early retirement), as it will be paid for longer. How much your benefits are reduced by depends on how early you take them.
However, current LGPS rules state that if you're 55 or over and have been in the scheme for two years or more, your benefits are due immediately and unreduced if you're made redundant or retired because of business efficiency. Unlike early retirement (see above), no reductions are applied to your benefits and your employer must pay an amount of money to the pension fund to cover the cost of your benefits being paid early unreduced. The amount of money your employer pays is called the pension strain cost.
The government has said the way pension strain is currently worked out will be changing to give a standard cost across all pension funds in the LGPS in England.
I’m currently under consultation for redundancy. How can I find out if my exit payments are more than the £95k cap?
If your employer is affected by the new regulations, you’re 55 or over and have been given notice of redundancy, your employer should have already asked for a quote for the pension strain cost from the fund. However, you'll need to discuss with them the effect the recent change in regulations may have on the information they have given to you.
If you haven’t been provided information by your employer, you need to discuss this with them. The pensions team are not providing, as standard, benefit quotations to employers for cases that would create a strain charge. Your employer would need to contact the team directly to discuss your case.
Normal quotations can only resume when the LGPS regulations have been laid and implementation date known.
If you’re facing immediate redundancy from an employer who is covered by the exit payment cap regulations and your exit payment (including pensions strain) will be more than the cap, your current options are:
- take a deferred benefit payable from your normal pension age
- or immediate payment of your pension benefits with a full early retirement reduction applied
If you have any concerns about an ongoing redundancy case and your employer is likely to be affected by the cap, please speak to your employer.
Following the enactment of the exit payment regulations, HM Treasury (HMT) published the following documents which you may wish to read to find out more:
Last updated: 4 November 2020