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£95k exit cap and further reform proposals

1. Restriction of Public Sector Exit Payment Regulations 2020 (£95k cap)

The exit cap applies to all public sector employees and employers including employers and employees of Councils (whether Borough or Parish/Town) Police and Fire Authorities and Academies.

The Restriction of Public Sector Exit Payments Regulations 2020 required to implement the £95K cap were approved by Parliament on 30 September 2020. However, the regulations still have to be laid. This can happen at any point from now onwards, although we don’t know the exact date at present.

Once the regulations have been laid there will be a period of 21 days before scheme employers will be required to apply them. Once the regulations are in place (for employers in scope), in the case of any employee who terminates and where the total of statutory redundancy pay, additional severance pay and ‘actuarial strain’ (payable to the Pension Fund), exceed £95,000, then total compensation will need to be capped at £95,000.

This will potentially impact any employees who may have already received quotations for termination on the grounds of redundancy and business efficiency, who leave after the exit cap regulations are enacted.

The Local Government Association (LGA) and Local Government Pension Funds are seeking urgent clarification from the government on the two matters below:

  • the position for exits agreed before the legislation takes effect but where the date of leaving is after
  • the position if the HM Treasury regulations come into effect before Ministry of Housing, Communities and Local Government (MHCLG) can introduce the necessary changes to the LGPS regulations to accommodate it

The LGA and Local Government Pension Funds will continue to press the government for answers and we will update employers.

Urgent action to be taken by public sector employers

Employers should carefully consider and assess the impact the changes confirmed by the government will have on their organisation and employees, specifically if an employee’s retirement date is after the implementation of the exit cap.

*Please note: due to the uncertainty around the implementation of the £95K cap we have temporarily suspended providing any redundancy estimates for employers in scope of the cap, until we have received further guidance.*

2. Consultation on changes to the Local Government Pension Scheme (LGPS) and Discretionary Compensation Regulations

There is a separate consultation on changes to the LGPS and Discretionary Compensation Regulations. (This is still pending an implementation date).

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/916615/Reforming_local_government_exit_pay_consultation.pdf?_cldee=aGVpZGkuY2F0aGVyYWxsQGNoZXNoaXJld2VzdGFuZGNoZXN0ZXIuZ292LnVr&recipientid=contact-4cd26ae1d3b64e779e42fe75cb6798be-8a5a27a088dd4f05a775428f5de9212c&utm_source=ClickDimensions&utm_medium=email&utm_campaign=PS&esid=0d5aeeba-f502-eb11-8101-001dd8b71e0b

These proposals will limit the payments made to, or in relation to, employees of ‘reform employers’ in addition to statutory entitlement as follows:

  • the actual pay used in severance calculations will be limited to £80,000
  • the maximum severance (including statutory redundancy pay) will be limited to 3 weeks’ pay per year of service or 15 months’ pay, whichever is the lower
  • no severance will be payable if the member receives an immediate pension with a payment by the employer to cover the cost of early release of pension – the strain cost – except in the case of the severance amount exceeding the strain cost in which case the excess would be payable

Further information

To further assist employers, see the Scheme Advisory Board’s website for all the latest information on public sector exit payment cap