Public sector exit payments
On 4 November 2020, the Government introduced a cap of £95,000 on the overall redundancy packages to public sector employees. GOV.UK have published a full list of affected employers and you’ll need to check this list to decide whether the cap applies to you.
The ‘exit payment cap’ includes:
- redundancy payments (including statutory redundancy payments)
- severance payments
- other payments made due to ending the employment
- employer strain costs to provide early unreduced access to LGPS benefits
HM Treasury have produced guidance and directions to accompany the exit payment regulations.
Conflict in regulations
There’s currently a conflict between the exit cap regulations and the LGPS regulations, if the cap is breached. The LGPS regulations still require an active member aged 55 or over, who leaves the LGPS because of redundancy or business efficiency, to take payment of an unreduced pension, but the exit cap regulations stop employers from paying the full strain cost. Draft amendments to the LGPS regulations have been published to eliminate this conflict and introduce further measures to cap exit payments but these are still under consultation. You can find our response to this consultation below. Until the new regulations are passed, the conflict will remain and must be managed.
Our approach during this transition period
1. To engage with employers to see if redundancies/business efficiency retirements can be delayed until the LGPS regulations are changed.
2. Where they go ahead before the LGPS regulations are changed and the total cost of a member’s redundancy package (including strain cost) is more than the £95k cap, we’ll pay a reduced early retirement pension (or a deferred pension payable at normal retirement age); but
We recommend that you delay any decision about whether to pay the member a cash sum equivalent to the capped strain cost, but advise that employers should take their own legal advice on this point.
If the cap doesn’t apply to an employer, or is not breached, an unreduced pension will be paid to the member and the strain cost should be paid by the employer, as it is now. We’ve created a document on our approach to the statutory cap on exit payments, which can be found on the key documents page of our website under ‘Other statements and policies’.
Process for redundancy and efficiency exits
Step 1: Check if the £95k exit cap regulations apply to you
GOV.UK have published a full list of affected employers and you’ll need to check this list to decide whether the cap applies to your organisation. If they don’t, please let us know and we’ll process the exit as normal.
Step 2: Check the total value of exit payments
If the £95k exit cap regulations apply, check the total value of exit payments you’d normally make, including the strain cost (we’ll give you the strain cost).
Step 3: Let us know if the exit payments are below or equal to £95k
If the total of the exit payments is below or equal to £95k, please let us know and process the exit as normal.
Step 4: Let us know if a waiver applies
If the total value of the exit payments is more than £95k, think about whether either a mandatory or discretionary waiver may be applicable. If it is, follow the process and let us know of any request made, and the final outcome. If the waiver applies, process the exit as normal.
Step 5: Check whether any non-statutory exit payments can be reduced
If a waiver is not applicable, or is turned down, think about whether any non-statutory exit payments, other than the pension strain cost, can be reduced to bring the total below or equal to £95k.
Step 6: Let us know if the employee is uncapped
If the new total is below or equal to £95k, immediate payment of unreduced benefits and the normal process for meeting the strain cost will apply. You’ll need to submit the normal leaver’s form and let us know that the employee is uncapped.
Step 7: Let us know if the employee is capped
If the new total is above £95k and made up of only pension strain cost, statutory payments and other payments you have to make, we won’t make immediate payment of unreduced benefits. Instead, we’ll give the member the choice of either payment of a fully reduced pension or a deferred pension. You’ll need to submit the normal leaver’s form and let us know that the employee is capped.
Step 8: Decide whether to pay a cash alternative
You’ll need to decide if you want to pay a cash alternative to the member and let us know of your decision. We and SAB recommend that you defer this decision but you should take your own legal advice on this point.
Further detail on these steps and a flow chart to help you through the process are available in the LGA Guidance.
Early retirement strain cost factors
Early retirement strain cost factors are used to work out the added cost to an employer, to account for the funding shortfall from paying an unreduced pension early. Before, these factors didn’t impact members’ benefits and they followed standard actuarial principles which meant:
- Factors were based on local assumptions during the valuation of the Pension Fund.
- Strain costs were larger for women than men, as on average, women tend to live longer than men.
Under the new regulations, the strain cost factors will have an impact on whether or not the £95k cap has been breached and therefore what benefits a member may get. When the LGPS regulations are changed, updated factors and guidance on methodology will be given by the Government Actuary Department (GAD). In the meantime, our Fund actuary has given us new unisex factors that are meant to give strain costs that are as far as possible consistent with those expected from the updated GAD guidance and factors. They will be used until we’ve added the updated GAD factors and methodology to our systems.