Reform of Local Government Exit Payments

The statutory provisions governing exit payments to local government workers are in the process of reform.

This consists of three separate elements:

  1. The implementation of a £95,000 cap on public sector exit payments, including employer contributions to pension costs. The cap also applies to other public sector workers and came into effect on 4 November 2020
  2. Reform of the Discretionary Compensation Payments Regulations and Local Government Pension Scheme Regulations to place additional restrictions on severance payments and limit the amounts an employer can contribute to pension strain costs where an employee aged 55 or over draws their pension early as a result of exiting
  3. Proposals to require high earners to repay severance payments if they secure re-employment in the public sector within 12 months

The proposals to require high earners to repay exit payments if they return to the public sector have previously been consulted on but there has been no further indication of if and when this proposal will be implemented. Therefore, the two most important issues currently are the implementation of the £95,000 exit payment cap and the proposed reform of the Discretionary Compensation Payments Regulations and Local Government Pension Scheme Regulations.

£95,000 cap on exit payments

In 2015 the government first announced plans to introduce a cap on exit payments in the public sector. The cap applies to the total amount payable when someone exits and so applies to the total of severance payments, any pension strain cost and notice payments in excess of three months. The cap, set at £95,000, was legislated for in the Enterprise Act 2016, which amends the Small Business, Enterprise and Employment Act 2015, but required secondary legislation to be introduced.

On 10 April 2019, HM Treasury opened a consultation on draft regulations, Directions and guidance to implement the exit cap. This included provisions about the circumstances in which, and by whom, the cap could be waived. The consultation closed on 3 July 2019.

The LGA response to the £95,000 cap consultation made detailed comments on the practical and statutory complexities of introducing the cap and its effects.

On 21 July 2020, HM Treasury published the government’s response to the consultation and laid the implementing regulations in Parliament. These were approved by the House of Lords on 23 September and the House of Commons on 30 September. They were officially made on 14 October and came into effect from 4 November 2020.

On 21 December we had confirmation from Government that for the purposes of calculating individual exit payments for the £95,000 cap, employer National Insurance contributions should not be included.  There still remains a number of issues outstanding but this is a welcome clarification we have been seeking since 4 November.  

What follows is a position statement produced on 30 October 2020 for local authority employers based on currently available information.  The situation is rapidly developing and councils should ensure they have checked for the current position and sought their own legal advice where required. 

Directions and Guidance (HM Treasury)

On 29 October HM Treasury published its Guidance on the Exit Cap Regulations and its Direction on the relaxation of the cap, also known as waivers, under Regulations 10 and 11.  Despite the representations made, the content of these Guidance and the Direction are very similar to the earlier drafts. HM Treasury also published the Equalities Impact Assessment  for these Regulations alongside the Guidance and Direction.

In a local government context the waiver power is exercisable in the case of:

  • a devolved Welsh authority, by the Welsh Ministers instead of by a Minister of the Crown;
  • a local authority in England, by the full council of that local authority;
  • a fire and rescue authority in England, by the fire and rescue authority.

Except for payments made by a devolved Welsh authority, the power to relax the cap must be exercised in accordance with the Direction, or with HM Treasury consent. Aside from provisions relating to health and safety claims, the Direction takes materially the same form as the 2019 draft. The LGA responded to the consultation on that draft in detail, many of the issues raised remain unresolved.

Under the Direction, mandatory relaxations apply where:

  • the obligation to make the exit payment arises as a result of the application of TUPE Regulations or the EU Acquired Rights Directive. Please note, this may therefore   not apply to TUPE-like transfers resulting from local government re-organisation where employees transfer under legislation other than the TUPE Regulations; or,
  • the payment relates to a complaint that an employment tribunal has the jurisdiction to consider under the whistleblowing provisions of the Employment Rights Act 1996, the discrimination provisions of the Equality Act 2010, or health and safety related detriment and dismissal claims. This can include payments made under a settlement agreement to settle a grievance or employment tribunal case.

Discretionary relaxations could also apply where the Decision Maker (full council in the case of an English local authority or Welsh Ministers in Wales) is satisfied:

  • that not exercising the power would cause undue hardship
  • that not exercising the power would significantly inhibit workforce reform
  • that a written agreement to exit was made before the coming into force of the Regulations; and
    1. it was the intention of both parties that the exit would occur before that date; and
    2. that any delay to the date of exit was not attributable to the employee or office holder as applicable.

The Guidance sets out more information on the waiver process and provides that where the full council of an English local authority or a fire and rescue authority exercises the discretionary power to relax the cap it has to submit a business case to MHCLG for approval by the Principal Accounting Officer (the Permanent Secretary) and the Minister before it is then submitted to HM Treasury for approval. In the case of a mandatory relaxation the authority does not need HM Treasury approval but still needs MHCLG approval. There is a proforma in the Guidance that employers should use to seek approval from HM Treasury.

It is recommended that employers read the Guidance, as it also contains information on:

  • employers in scope
  • what payments are covered; and
  • employer and employee responsibilities

Exits in Progress

On 16 December MHCLG issued a guide for local authorities  for the interim period until MHCLG regulations come into force amending the Local Government Pension scheme rules in line with the Exit Cap Regulations.  Notwithstanding the guidance from MHCLG the LGA recommends authorities seek legal advice relating to their specific circumstances regarding any exits occurring on or after 4 November 2020 that may exceed the cap.

Legal Challenges to the Regulations

We are currently aware of five potential challenges to the Exit Cap Regulations by means of Judicial Review.  Cases have been lodged by the BMA, UNISON, GMB, Lawyers in Local Government /SOLACE/ALACE and the FDA.  We await further developments but as things stand, the Regulations took effect on 4 November 2020.

MHCLG Consultation on Reforming Local Government Exit Pay

In light of the delay in publishing the draft implementing Regulations to accompany their consultation, MHCLG have extended the deadline for responses on the draft Regulations to 18 December.  The deadline for responding to the policy consultation however remained as 9 November.  This delay on the draft Regulations consultation means that the Local Government Pension Scheme Regulations will not be amended until early 2021. This leaves the sector in the position of having pension scheme rules that appear at odds with the Exit Cap Regulations. Further details on the MHCLG consultation are at the end of this webpage, and in the interim we set out below further considerations for employers in relation to pension strain payments prior to the LGPS rules being amended. 

As set out above, MHCLG have now published some guidance for authorities however, the LGA has raised a number of issues with this guidance with the department.  Further information is available on the LGPS Scheme Advisory Board (SAB) website.

Pension Strain Payments 

Local authority employers are referred to the LGPS Scheme Advisory Board commentary on the £95,000 exit payment cap coming into force on 4 November 2020 under the Exit Cap Regulations and the impact on employer’s pension strain payments as a consequence of an unreduced pension being paid by a pension administering authority under the LGPS Regulations for those aged 55 or over.

Employers will see from the note produced by the LGPS Scheme Advisory Board that, any pension paid to the employee, including an entitlement to an unreduced pension under Reg 30(7) of the LGPS Regulations is not payable by the employer – instead it is payable by, and the responsibility of, the LGPS administering authority. The LGPS administering authority can though then request a strain payment from the employer, which could be a sum which would result in a breach of the £95k cap. Under the Exit Cap Regulations, employers can make a strain payment up to that amount, allowing for the value of other exit payments made to this individual.

To ensure that employees who are not subject to the cap continue to receive an unreduced pension, employers must notify the LGPS administering authority of any employees who are subject to the cap (including strain cost) prior to the exit.

Employers are also referred to the letter of 28 October from MHCLG Minister, Luke Hall, sent to LGPS administering authorities and local authority chief executives, in which the government set out its view that the Exit Pay Regulations effectively curtail the use of LGPS Reg 30(7) to pay an immediate unreduced pension when the cap is breached.  According to this view, a ‘capped’ member should only receive an immediate pension under LGPS Reg 30(5) (with actuarial reductions applied), or a deferred pension, together with a ‘cash alternative’ payable by the employer under cap Reg 8 of the Exit Cap Regulations.

Employers and LGPS administering authorities will need to take their own legal advice on what to do in the period between the Exit Cap Regulations coming into force on 4 November and the LGPS Regulations being amended early next year to expressly remove the entitlement to an unreduced pension under Reg 30(7) which would result in a breach of the cap. However, subject to any such advice, the SAB opinion which is based on the legal advice it has obtained, is:

“the course of action presenting the least risk to both LGPS administering authorities and scheme employers is for the:

  • LGPS administering authority to offer the member the opportunity to take a deferred benefit under LGPS regulation 6 or a fully actuarially reduced pension under LGPS regulation 30(5)
  • Scheme employer to delay the payment of a cash alternative under regulation 8 of the Exit Cap Regulations”

In considering what steps to take key considerations for employers are as follows.

It is for the LGPS administering authority, not the employer, to decide whether to pay an unreduced pension under LGPS Reg 30(7) or a reduced pension under Reg 30(5). Employers should ensure the LGPS administering authority has confirmed what it intends to do, and that the employee understands the position.

In the first instance, the employer is responsible for paying statutory redundancy pay. In terms of any other payments from the employer, however, such as enhanced redundancy pay under its discretionary compensation scheme, employers should take legal advice on the extent of such entitlements and the balance of risk of delaying further payments.

The Exit Cap Regulations provide that a payment in consequence of a court or tribunal order is not subject to the cap. Therefore, should an employee succeed in a claim against an employer to obtain a payment in excess of the cap, the employer would have to pay that sum.

Should an employer go ahead and make a cash alternative payment under Exit Cap Reg 8, it could still face increased employer pension contributions in the longer term. In any event, if an employer chooses to go ahead and pay a cash alternative payment it would be advisable not to make the payment until it is clear what the LGPS administering authority obligations are in regard to payment of pension.         

The payment of a cash alternative to an employee will incur income tax and employer National Insurance contributions (on the total of all termination payments in excess of £30,000 albeit the employer National Insurance contributions do not count towards the £95,000 cap). HM Treasury Guidance (paragraph 4.4) is clear that a cash alternative may be paid to the scheme administrators. Following an unsuccessful challenge, an employee who receives a reduced pension may have preferred the amount to be paid into the LGPS in order to purchase additional pension rather than receiving it as cash. This will not be possible if the cash alternative has already been paid to the employee.

It is important that the employer is clear with the employee what its proposed course of action is, and trade union representatives should be involved in those discussions, particularly where payments are delayed.

Bearing in mind all the considerations, and in particular the risk of claims, some employers may consider the most prudent course of action is to delay any redundancies until the amendments to the LGPS Regulations have been made and/or the legal position is settled. We recognise though that in many cases that may not be possible.

Position statement ends.

MHCLG Consultation: Reform of Discretionary Compensation Payments Regulations and Local Government Pension Scheme Regulations

As referred to above, as part of an intended wider reform of severance payments across the public sector, on 7 September 2020 MHCLG opened a consultation seeking views on proposals for reforming exit payment terms for local government workers. This is separate to the broader £95,000 cap on exit payments and will affect workers with much smaller severance payments. In particular, it affects employees over age 55 who will be entitled to have their pension brought into payment if they are made redundant and those of any age earning above £80,000 per annum. The consultation closed on 9 November 2020. Due to the delay in publishing the draft Regulations, the consultation on those does not close until 18 December, as a result we now do not expect the LGPS rules to be amended until 2021.

The proposed changes include:

  • Capping severance payments at a maximum of 3 weeks’ pay per year of service or 15 months’ salary
  • Imposing a maximum salary level on which calculations for severance pay can be based (currently £80,000)
  • Preventing an employer making a discretionary redundancy payment in addition to a payment into the LGPS (pension strain cost) except in very limited circumstances
  • Provisions to limit payments an employer can make into the LGPS (pension strain cost) where an employee receives a statutory redundancy payment (by reducing the strain cost payment by the amount of the statutory redundancy payment)
  • Making the necessary changes to the Local Government Pension Scheme to cater for these changes and the effects of the broader £95,000 cap.

More details of this consultation can be found in Advisory Bulletin 683 and on the Local Government Pension Scheme Advisory Board Website. The draft Regulations can also be found on the Local Government Pension Scheme website.

The LGA responded to the consultation: LGA Response to the MHCLG consultation on reforming local government exit pay

Further information

LGA held a preliminary webinar on 23 September explaining the impact of the £95,000 exit payment cap and proposed further reforms of severance pay in local government.

A further webinar was held on 6 November and it contains information on what steps authorities may want to take in the interim period between the £95,000 exit payment cap coming into effect and the reform of the LGPS rules.

The LGPS Advisory Board also has information for authorities relating to their obligations under the Local Government Pension Scheme, including specific information for scheme employers on exits on or after 4 November until the LGPS Regulations are changed to accommodate the exit pay cap.