Public sector exit payments cap – impact on the Teachers’ Pension Scheme

Read the information and guidance on the Public Sector exit payments cap.

The Teachers (Compensation for Redundancy and Premature Retirement) Regulations 2015 (the Compensation Regulations) set out the compensation that can be awarded at the discretion of local authorities to teachers, in certain circumstances.

The Restriction of Public Sector Exit Payments Regulations 2020 (the Exit Payments Regulations) came into force on 4 November 2020; the compensation that can be awarded under the Compensation Regulations, namely

  • Discretionary Compensation for Redundancy
  • Discretionary Compensation for Termination (DCT)
  • The cost to the employer of Premature Retirement Compensation (PRC)

are all exit payments that are subject to the £95k exit payment cap.

The Department for Education (DfE) will be providing guidance for employers in scope of the Compensation Regulations:

  • to explain how to capitalise the costs of PRC, to assess against the £95k cap, and
  • what action should be taken if there is a breach.

We understand from the DfE that employers should follow the following process until the Compensation Regulations are revised:

  • Employers should first find out the capitalised costs of any PRC. Guidance is to be added to the Teachers’ Pensions website to estimate the capitalised costs but the final figure may have to be requested from Teachers’ Pensions.
  • Employers must assess the total value of any exit payments (exit payments subject to the cap are set out in regulation 5 of the Exit Payments Regulations).
  • If the total value is more than £95,000, employers should then consider whether to apply for a waiver to relax the cap (set out in the Exit Payments Regulations).
  • If a waiver is not applicable or refused, PRC will not be payable and instead a ‘cash alternative’ payment should be made under regulation 8 of the Exit Payments Regulations; this payment should equal the ‘capped’ capital value of the compensation. This would be dependent on an employer’s policy and whether it had been changed to comply with the £95k cap.

The DfE will be consulting on changes to the Compensation Regulations in the new year, with revised regulations expected to come into force in the spring. We understand that DCT will be amended in line with HM Treasury proposals set out in 2016 and mirror the equivalent changes in local government, limiting DCT to:

  • a maximum of 3 weeks’ pay per year of service
  • a maximum 15 months’ salary
  • the actual pay used in calculations will be limited to £80,000

The regulations will also set out a methodology for dealing with PRC where the value is more than £95,000.