Reform of Local Government Exit Payments

On 12 February 2021 HM Treasury published a Treasury Direction disapplying the parts of the Restriction of Public Sector Exit Payments Regulations 2020 (the Exit Cap Regulations) which implemented the £95,000 cap on public sector exit payments, with immediate effect. The Direction was accompanied by guidance on how exit payments which were capped during the period when it was in force should now be handled. In that respect the guidance provides that where the cap was applied, the ex-employee should contact their ex-employer to request the amount they would have received had the cap not been applied, and employers “are encouraged to pay” the additional sums that would have paid but for the cap.

On 25 February the Restriction of Public Sector Exit Payments (Revocation) Regulations 2021 (the Revocation Regulations), were then placed before Parliament which will come into force and formally revoke the Exit Cap Regulations on 19 March 2021. The Revocation Regulations also contain a legal obligation for employers to make payments to employees (or to other persons including public sector pension schemes in relation to those employees) who left during the period between the original regulations coming into force (4 November 2020) and the date of the Revocation Regulations coming into force. Those payments are the difference between what was paid and the exit payments that the employee would have been entitled to had regulation 3 of the 2020 Regulations (i.e. the cap) not been in force. However, given that the disapplication Treasury Direction effectively 'switched off' the restrictions on 12 February 2021 that should be the last date any payment was restricted. Payments made under the Revocation Regulation should include interest calculated in accordance with the Judgment Debts (Rate of Interest) Order 1993. For details on how this should be calculated see the LGPS exit pay cap information for employers

The Welsh Government has confirmed that, in their view, the exit cap no longer applies to exit payments made by a devolved Welsh authority.

On 4 March, MHCLG confirmed in writing that the letter of 28 October 2020 is withdrawn and that the consultation on the further reforms is now closed. There will be no further changes made to the LGPS or local government redundancy terms without a further, separate consultation. MHCLG also indicate that further guidance will be issued relating to the reinstatement of pension entitlements following the revocation of the Exit Cap Regulations.

Guidance for LGPS employers is also available on the LGPS website, as is  guidance for LGPS administering authorities which covers in particular the situation where the cap impacted on the ability to pay in full the pension strain cost of funding an unreduced pension for LGPS members made redundant, or who left on business efficiency grounds, when aged 55 or over. It also sets out the following immediate action points for employers:

  • Identify any exits between 4 November 2020 and 11 February 2021 where you were not able to pay the full strain cost because of the exit cap.
  • If you applied for a mandatory or discretionary waiver this is no longer needed. You must pay a full strain cost if requested to and you should notify your LGPS administering authority accordingly. The LGPS Scheme Advisory Board  has provided advice on how to calculate any interest that may be payable on pension benefits and strain costs.
  • Check if you made a cash alternative payment as set out in regulation 8 of the Exit Cap Regulations and as referred to in the MHCLG correspondence.
  • If you have not made a cash alternative payment you should make provisions to pay a full strain cost to the LGPS administering authority plus any interest due. You may wish to send a list of affected members to your LGPS administering authority to let them know which employees are affected.
  • If you have made a cash alternative payment you should

    - pay a full strain cost to the LGPS administering authority if they request it

    - and prepare to seek recovery of the cash alternative payment made to the employee when the LGPS administering authority confirms they will be paying an unreduced pension. The LGA recommends authorities to take this step in the interests of effective use of public money and the reputation of the sector.
  • You should review other termination payments that were restricted due to the exit cap in line with your policy, e.g. discretionary compensation pay. You may also be approached by employees seeking additional amounts where such termination payments were made. The LGA recommends that local authorities consider requests from employees in line with the requirements of the Revocation Regulations, their published policies and their own legal advice. Other employers may wish to take the same approach.

As the cap no longer applies, if an LGPS member exits on or after 12 February 2021 due to redundancy or business efficiency at age 55 or over:

  • The member is entitled to and must take an unreduced pension.
  • If requested, employers must pay to the administering authority the strain cost associated with the early payment of that pension. 
  • Employers must not make a cash alternative payment as set out in regulation 8 of the Exit Cap Regulations.

Future developments

The guidance on the removal of the exit pay cap states “For the avoidance of doubt, it is still vital that exit payments deliver value for the taxpayer and employers should always consider whether exit payments are fair and proportionate. HM Treasury will bring forward proposals at pace to tackle unjustified exit payments.” Therefore, it is anticipated the cap or similar will be re-introduced in some form and related further reforms will be made to the LGPS and local government redundancy terms. The Government has not confirmed when these changes will be re-introduced, although we consider it is unlikely to happen in the next few months due to the changes necessary to legislation. Employers will need to consider the possibilities presented by both when undertaking future workforce reforms. Employers should therefore include appropriate warnings when providing employees with information on their potential exit packages.

Finally, the proposal to require high earners to repay exit payments if they return to the public sector has previously been consulted on but there has been no further indication of if and when this proposal will be implemented. 

For reference purposes

Full details of the now revoked Exit Cap Regulations and the previous MHCLG consultation on pension and redundancy reforms can be found in Advisory Bulletins 686, 684 and 683, plus previous bulletins referred to therein.