Capping exit payments has proved a long winding road for LGPS. Kirsty Bartlett and Susan Oakley look at the implications from new proposals.
To say that there have been a few distractions for the government in recent years would be an understatement, and we are all well aware of the reasons why many government proposals have taken so long to come to fruition (dare we mention the “B” word?). One of the items that has been on somewhat of a backburner until recently is the proposed changes to the payments made on redundancy in the public sector.
It may have taken five years from the government first announcing plans to cap exit payments, but it seems that the draft regulations, appropriately termed “The Restriction of Public Sector Exit Payments Regulations 2020” are soon to be brought into effect, followed by updated guidance and HMT Directions.
The latest consultation on the topic was recently issued by the MHCLG (Ministry of Housing, Communities and Local Government) on the effect the proposals will have on the regulations which currently govern exit payments in local government, and the impact on the local government workforce (the “Consultation”). We have shared our thoughts on the consultation below, and we recommend that LGPS funds and local government employers consider submitting a response; the consultation remains open until 9 November 2020.
The proposed cap
The proposed cap amount of £95,000 is intended to apply to all payments relating to an exit as a whole. While there are a number of exemptions to the cap (for example, death in service benefits or ill health early retirements), when combined, any redundancy payment, pension strain costs (discussed below) or other related payments linked to a person’s exit must not exceed the exit payment cap.
Currently, under the LGPS Regulations 2013, employees aged 55, or above, who are members of the LGPS are automatically entitled to immediate access to an unreduced pension if they are made redundant, or have their employment terminated on business efficiency grounds. A participating employer in the LGPS must meet the additional costs associated with these increased benefits coming into payment earlier than a fund had planned for—known as pension strain costs. Each LGPS fund is responsible for calculating these costs taking into account its individual funding position.
The new regulations mean that any pension strain costs will count towards the overall cap of £95,000. If the cap is exceeded, the redundancy package must be scaled back. Employees must, however, receive at least their Statutory Redundancy Payment. It is proposed that a standard methodology is used to calculate strain costs across all LGPS funds for the purposes of assessing whether the exit payment cap is exceeded.
To tackle some of the issues arising from the cap being exceeded, particularly in light of the fact that not all employees may wish to take an immediate pension if made redundant past age 55, a new element of choice is to be introduced, allowing a number of options for calculating an employee’s redundancy package, whilst still falling within the cap. If pension strain costs mean the cap would be exceeded then (subject to any Statutory Redundancy Payment being factored in, as this must always be paid to an individual) an employee can choose how much of their remaining redundancy package will be paid as cash or used to meet some or all of the pension strain cost. So, for example, an employee could choose to:
- Defer their pension benefits until normal retirement age and receive a full lump sum redundancy payment (obviously subject to this payment being within the cap); or
- Take a partially actuarially reduced early retirement pension, with the strain costs calculated using the standard methodology less the Statutory Redundancy Payment (again, subject to the strain costs being within the cap).
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Key considerations
The intention behind the cap is to strike a better balance between treating individuals and the taxpayer fairly. In respect of pensions, this will limit publicly funded pension top-ups. The ability to determine exit arrangements will be restricted for both funds and employers, and will result in an additional burden of work in calculating and implementing an exit payment.
Actuarial guidance for LGPS funds is to be provided by the Government Actuary’s Department to ensure a consistent approach is taken across funds when calculating pension strain costs. Until this is issued (and no timeframes for this have been indicated), there remains a great deal of uncertainty on how this should be done in the interim period between the regulations coming into force and the guidance being issued.
There is also a question as to how funds will reconcile the standard methodology for calculating the value of an individual’s exit package with the actual funding impact of early retirement pensions.
This isn’t the only practical consideration to be aware of. It is important that any early retirement packages linked to redundancies currently being prepared are appropriately caveated as, depending on when these are issued, there is a likelihood that the new regulations could come into force ahead of the actual retirement dates rendering the quotes potentially inaccurate.
Additionally, not all scheme employers within the LGPS are covered by the cap and it remains to be seen whether the same flexibility will be made available to uncapped employees on redundancy. We suggest that you discuss any concerns or questions that you may have with your professional advisers.
As mentioned above, we strongly recommend that those with an interest in the matter should read and submit a response to the consultation. Similarly, LGPS funds and local government employers should keep close watch for the regulations coming into effect, as the cap will be in force 21 days later. This doesn’t leave much time to ensure that any retirement quotes correctly fall within the new cap, so advance planning is essential here.
Kirsty Bartlett is a partner and Susan Oakley an associate at Squire Patton Boggs.
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