Charles Pallot 03 December 2020

The new cap on Public Sector Exit Payments

The new Restriction of Public Sector Exit Payments Regulations 2020 took effect on 4 November 2020, capping exit packages for all public sector employees and office holders at £95,500.

The Regulations are supported by Directions which relate to the relaxation of the cap in certain cases and formal Guidance?, which interprets the Regulations.

As you would expect, the Regulations list the elements of an exit package which must be taken into account in establishing whether the total package is within the cap, and set out the circumstances in which the cap can be relaxed, on a mandatory or discretionary basis.

One element which does need to be taken into account is any "strain payment" which may be due to the LGPS on the departure of the employee or officeholder.

Where a departing employee or office-holder is a member of the LGPS (which is a “funded” defined benefit pension scheme), and has reached the age of 55 by the time of their redundancy, they will be entitled to an unreduced LGPS pension.

In those circumstances, the local authority employer will have to make a strain payment to the LGPS, as a contribution towards the cost of funding that early full pension.

Strain payments (which can be significant) need to be included in the calculation of the total package to see if it falls within the cap.

This means that local authorities need to allow for the cost of a strain payment before proposing an exit package to an employee. They may find that the majority of the cap has been used up by the strain payment, and there is not enough room within the cap to make the other payments to which the employee or office holder is entitled, or which would be required to get an exit deal across the line.

The problem here is that the Government has not yet amended the LGPS Regulations to take account of the introduction of the cap. In fact, the Government has extended the consultation period in relation to its proposed amendments to those Regulations until 18 December 2020, meaning that any such amendments will be unlikely to take effect until 2021.

Where this leaves us is that LGPS administering authorities will be required to pay unreduced pensions to departing local authority employees who meet the conditions under the Regulations, but the relevant local authority may not be able to make the full required strain payment to the LGPS.

The LGA has published a useful guidance document for local authorities covering these issues, which also refers to legal advice taken by the Local Government Pension Scheme Advisory Board?.

In outline, the LGA recommends that, if the planned exit package, including the payments which would normally be paid to employees on exit (presumably including notice pay and redundancy pay), and a strain payment, exceeds £95,000, the local authority should:

  • consider whether any of the mandatory or discretionary relaxations of the cap is available. Whilst local authorities can in exceptional circumstances apply to the MHCLG for a relaxation of the cap in cases which do not fall within any of the specific scenarios set out in the Regulations, it is hard to see that the MHCLG/Treasury would accept that the size of a strain payment would of itself amount to an 'exceptional circumstance';
  • if not: consider whether any of the other elements of the package can be reduced (bearing in mind that the Regulations provide that no redundancy payment can be reduced) to bring the total package, including the strain payment, within the cap; and
  • if not: consider whether to make a (permitted) alternative cash payment, still within the cap (although that can create risks, for the local authority, and a tax charge).

The LGA guidance also strongly recommends that local authorities maintain 'close contact' with their administering authority throughout this process, and we would also suggest that first contact is made as early as possible.

It is to be hoped that the Government acts quickly to make the required changes to the LGPS Regulations to clear this impasse.

It is not clear why the Restriction of Public Sector Exit Payments Regulations 2020 were enacted so quickly, when a statutory cap has been under consideration for such a long time, and particularly when it was clear that the Regulations would create this conflict between the rights and obligations of the local authority, the LGPS and the departing employee.

Charles Pallot is partner at Ashfords LLP

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