Briefing note – 25 September 2020
What we know so far:
The Public Sector Exit Pay Cap regulations (Restriction of Public Sector Exit Payments Regulations 2020) were laid before the House of Lords on 23 September 2020, much earlier that originally anticipated. We currently do not have a date for when they will be laid before the House of Commons.
Once the regulations are approved by both Houses, they will become law 21 days later. This could be as early at mid-October. The regulations will apply to all exit payments that fall due on or after the date that they come into force.
The MHCLG launched a consultation on the changes required to the LGPS Regulations and Compensation Regulations to be able to accommodate the Pay Cap rules and some additional reforms that were proposed approximately four years ago. These are likely to come into force some time later this year and were aligned to the original planned dates for the Exit Pay Cap regulations to move through Parliament.
Each Government Department was tasked with introducing these additional exit pay reforms within their area of jurisdiction. To date, no other department has successfully implemented the additional reforms and Local Government is currently the only live proposal for these changes.
We are still awaiting publication of the Direction and Guidance Notes and Equality Impact Assessment for the Exit Pay Cap regulations. Therefore, there are still some unknowns and the LGA are issuing guidance based on the draft versions.
The Exit Pay Cap
Applicable to ALL Public Sector Employers – Schedule 1 of the Regulations provides a full list.
The cap level remains at £95,000. It is not index linked so will remain at this level.
It includes pension strain costs, which remains one of the biggest concerns and without amendments to the LGPS Regulations will cause councils some challenges.
The Additional Reforms
Currently only applicable to Local Government Employees – as yet not applicable to teachers or NHS.
Introduce limits on the calculation of exit payments for those in Local Government.
The maximum number of weeks per year of service permitted will be 3. This means that if an employer has a multiplier of more than 2, those over the age of 41 will get a maximum of 3 weeks per year of service rather than 1.5 weeks times the multiplier.
This is then capped at a maximum of 15 months of pay.
The maximum actual salary that can be used to calculate redundancy will be capped at £80,000. So anyone earning more that this will have their weekly pay capped.
NOTE: 15 months at £80,000pa works out at more than £95,000 and so will be further capped by the Exit Pay Cap regulations.
If, as current timescales indicate, the Exit Pay Cap regulations come into force before the LGPS Regulations and Compensation Regulations are amended councils will be caught between two pieces of legislation requiring conflicting action. The LGPS Regulations will require an unreduced pension to be paid, but the Exit Pay Cap Regulations will prevent the employer from funding this. The LGA is seeking guidance from MHCLG on how to resolve this as neither piece of legislation will have primacy.
Impact on Exit Payments
The LGA ran a webinar on the exit pay reforms and provided a few examples of what the changes mean for those leaving with an exit payment going forward.
Those not entitled to immediate payment of LGPS Pension
Not in LGPS: receive Statutory Redundancy Pay (SRP) and Discretionary Compensation (Occupational Redundancy Pay – ORP) of up to 104 weeks pay and actual pay rather than capped at the statutory rate (£538 from April 2020).
In LGPS but under 55: receives the above and qualifies for deferred pension benefits which are paid between age 55 and 75 with appropriate adjustments for early or late access if taken before or after State Pension Age (SPA).
Not in LGPS: SRP plus ORP limited to maximum of 3 weeks pay per year of service, 15 months pay and max salary cap of £80,000. Also limited by £95k cap if appropriate.
In LGPS but under 55: same as Not in LGPS plus qualifies for deferred benefit payable in full at SPA.
Those in Membership of LGPS and over age 55 on leaving date
- SRP plus ORP in line with employer’s discretionary compensations policy
- Immediate payment of LGPS pension with no adjustment for early payment
Employer funds early payment of pension – the pension strain cost. This is determined locally by each LGPS fund administrator.
- Standardised strain cost calculated across all LGPS funds. This will have differing impacts on different funds and will be address by the funding review.
- Total exit pay limited to the greater of:
- Strain Cost (max £95,000)
- Discretionary payment, with new limits -3 weeks, 15 months, £80k annual pay to max of £95,000.
Strain cost under £95,000
Employee receives SRP and LGPS pension reduced based on SRP amount
Employee gives up SRP in exchange for unreduced pension
Rarely if the strain cost is less than the discretionary compensation the employee will receive an additional cash payment.
Employee receives SRP, ORP (subject to new limitations) and defers LGPS pension so no strain costs. The employee receives full payment of LGPS at SPA.
Employee receives SRP and ORP but receives their LGPS pension immediately. The LGPS is reduced based on standard factors to reflect the early payment date.
Where strain costs exceed £95,000
Employee receives SRP, immediate pension reduced so that strain cost = £95,000 less SRP. Employee option to give up SRP and use own funds to lower the reductions applied to their LGPS benefits (paying part of the strain cost themselves to increase their payable pension).
Employee receives SRP, ORP (subject to new limitations), deferred LGPS pension payable in full at SPA so no strain costs, or paid immediately on a reduced basis.
The number of options available and the complexity of the changes means that employers will need to be confident that their employees are aware and understand their options.
Waivers to the Cap
There are two types of waiver: Mandatory and Discretionary.
Payments made where there is a genuine believe that an award would be made by a Tribunal in response to a claim made for whistleblowing, discrimination, health and safety and other similar cases.
Payments guaranteed and protected by TUPE Regulation obligations. At this point it appears this will not apply to Local Government Reform or restructuring as these are not covered by TUPE but are undertaken under specific Transfer Orders. The normal outsourcing and insourcing of services will be covered where these are covered by the TUPE Regulations.
- Undue hardship – with a tight definition
- Workforce Reform – most likely to be used in LG
- Delay not attributable to the employee – e.g. when an employer delays the departure of the employee to facilitate smooth transition or completion of specific project.
- Waivers must be approved by Full Council, MHCLG Accounting Officer (permanent secretary), MHCLG and HMT Ministers.
MHCLG consultation: https://www.gov.uk/government/consultations/reforming-local-government-exit-pay
We will provide updates as they become available. In the meantime, if you have any questions please email firstname.lastname@example.org