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:

  • The implementation of a £95,000 cap on exit payments, including an employer’s contribution to pension costs, which will also apply to other public sector workers which comes into effect on 4 November 2020
  • Reform of the Discretionary 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 draws their pension early as a result of exiting
  • 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 imminent implementation of the £95,000 exit payment cap and the proposed reform of the Discretionary 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 capThis 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 so will come into effect from 4 November 2020. The consultation response acknowledged that respondents had highlighted discrepancies between the regulations and guidance and indicated that these would be remedied taking into account the detailed comments made. At this stage revised guidance and HM Treasury Directions have not been provided.

As the £95,000 cap will come into force before corresponding amendments are made to the Local Government Pension Scheme we are seeking urgent clarification of the position for those already in the process of exiting employment from local authorities.

Update 22 October - From 4 November 2020 up to the enactment of the MHCLG further reform proposals there is a position of legal uncertainty. This is due to the apparent discrepancy between the obligations on LGPS scheme employers under the Cap Regulations to limit strain cost payments, and the requirement for administering authorities to pay unreduced pensions to qualifying scheme members under existing LGPS regulations.

We understand there will shortly be a communication from Government to administering authorities on this matter.

The LGPS Advisory Board has requested the views of Counsel on the risks of challenge to administering authorities and the obligations of scheme employers during this period of legal uncertainty

Reform of Discretionary Payments Regulations and Local Government Pension Scheme Regulations

As part of an intended wider reform of severance payments across the public sector, on 7 September 2020 the Government 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 earning above £80,000 per annum. The consultation closes on 9 November 2020 and so it is not certain when any changes would take effect.

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.

Further information

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

The consultation on further reform to the Discretionary Compensation Regulations and LGPS Regulations has not yet closed and so the outcome of this is not yet known.

There are a number of technical issues about waivers and transitional provisions plus the interaction of the proposed £95,000 cap with the provisions of the LGPS given that the cap will be in force before the necessary changes are made to the LGPS rules to accommodate it. We are seeking clarification from Government and HM Treasury on these issues.

The LGPS Advisory Board also has information for authorities relating to their obligations under the Local Government Pension Scheme.