The Restriction of Public Sector Exit Payments Regulations 2020 restricting the value of severance packages to £95,000 in the public service was signed on 14 October 2020 so is now law.
What does it mean for the LGPS?
What has happened?
The restriction on exit payments regulations completed its process through parliament on Wednesday 30 September. Despite opposition parties opposing it was passed.
As set out in previous updates Anyone leaving after 21 days from the date the minister signs the regulation will be tested against the cap.
The minister signed the regulations on the 14 October It came into force on 4 November so severance packages will not exceed a maximum of £95,000 in value for members who are covered by these regulations who are redundant from that date.
What does it cover?
All payments made by the employer to the member or to improve the pension of the member when the member leaves service as a result of redundancy or efficiency of the service.
This includes: –
- Statutory Redundancy Pay
- Discretionary Severance Pay
- What the employer pays to remove any early retirement reduction on pension for those made redundant or retired by the employer over the age of 55
Who will be covered?
Most LGPS employers will be included. Example of employers that are not included are Higher Education and Further Education and private contractors.
Can the restrictions be exceeded?
Powers to relax restrictions are devolved to the Welsh Ministers for Welsh Authorities and to the Scottish Government and the Northern Ireland Executive to decide if and how it will apply in their Nations.
In England and Wales power to relax the restrictions is only by agreement of the whole council of a local authority however it is then only with HMT consent in England and a Welsh Minister in Wales.
Why LGPS is particularly hit
Most of those effected by this cap in the LGPS will be those who are made redundant after it comes into force who are over the age of 55.
What do the LGPS Regulations allow now?
Under current regulations a member made redundant or retired on the grounds of efficiency over the age of 55 has to take the pension they have earned in their current LGPS service immediately at the point of redundancy (including any previous LGPS service that a member has combined with the current service). This pension is not reduced by an early retirement factor for early payment as it would be if it was the member retiring voluntarily.
What does the employer pay to the LGPS fund?
The LGPS employer then must pay their LGPS fund the cost of removing the early retirement reduction. The cost of a member’s benefits is based on the member drawing their pension from their normal pension age.
If they draw their pension before their normal retirement age, they are receiving their pension for longer. Depending on how early this can be very expensive and put a strain on the LGPS fund if not paid for.
That is why the employer is asked to pay the fund for this cost. This is called the strain cost.
So how will this affect the £95,000 cap?
This strain cost that the employer pays will be included in the £95,000 exit cap. The cap will also include Statutory Redundancy Pay and any other severance payments.
This means that even some low and medium paid staff may hit the cap if they have more than 30 years’ service and made redundant in their mid to late 50’s.
Despite the government pushing ahead with the restriction on exit payments regulations to cap the cost, we have only recently received the standard assumptions that all funds in England and Wales will use to calculate the strain cost to see if it pushes the value of the total package above £95,000. As expected even those on moderate earnings with long service can be affected.
A number of examples are currently being worked on and will be issued shortly.
What happens if the strain cost together with the other payments exceed £95,000 before the LGPS Regulations are changed?
The LGPS regulations have not yet been changed so according to the LGPS regulations no part of the pension paid to those over 55 can be reduced for early payment even if it exceeds the cap.
However the government believes The Restriction of Public Sector Exit Payments Regulations 2020 being implemented from 4 November will prevent the payment of an unreduced pension if it exceeds the cap after that date, and the employer must as an alternative make a severance payment to the member up to the level of the cap
Urgent legal advice is being sought to challenge this on the grounds of discrimination and whether this can be forced on the LGPS.
Once the regulations have been changed and/or the legal position changes the position if the £95,000 cap is exceeded, then part of the pension will be reduced by an early retirement factor. It is important to note if the cap is exceeded by a small amount the likely shortfall in pension is likely to be small.
Draft consultation Ministry of Housing, Communities and Local Government (MHCLG) on reforming exit pay.
This consultation on the policy document ended on 9 November. There is a further consultation on the draft regulations based on the proposals that will end on 18 December.
Any changes arising from this will come in some time after the £95,000 cap came into force that is causing serious difficulties for local authorities and legal uncertainty.
Does it just apply to England and Wales?
It is up to the Scottish Government and the Northern Ireland Executive to decide if or how these proposals will apply in their Nations. We have had confirmation that these draft regulations will also cover Wales
What are the main proposals on taking a pension if made redundant after the minimum retirement age that is 55?
For those over 55 being made redundant it proposes that the regulations allow for only part of the early retirement reductions be removed if the cap is exceeded.
It proposes to give members the option to defer their pensions and take a severance payment
Or take the pension and if the cap is exceeded, the member to pay any excess out of their own pocket to remove any reduction or take the reduced pension.
What does it propose on discretionary severance payments?
The consultation also proposes to reduce the maximum discretionary severance payment for all members made redundant to: –
- A maximum of 3 weeks per year of service
- Up to a maximum of 15 months’ pay
- Setting a maximum salary that an exit payment can based (e.g. NHS scheme salary limit is £80,000).
Additional limits where a strain payment is made to remove a reduction on pension
Statutory Redundancy Pay and any additional severance payment will be offset against the strain cost even if the strain payment and additional severance payment in total would be well under the £95,000 cap.
Attached is worked examples produced by the MHCLG. It shows how the proposal to offset any Statutory Redundancy Pay (SRP) and any Discretionary Severance Pay (DRP) against what the employer pays to the LGPS fund towards not reducing the pension for early payment ( the strain cost) reduces the package even for lower paid members with not particularly long service.
You will see in ‘individual 1’ the combined value of the severance package would be £62,000 but under the proposal it would be reduced by 37% to £39,000.
Does this offset apply now?
The £95k cap is in force for those covered by the Restriction in Public Service Exit payments regulations
However, the offset of Statutory Redundancy Payment and any Discretionary Severance Payment should not apply after 4 November until, or if the LGPS regulations are ever amended in this way.
Is there any protection for those in the process of agreeing redundancy now?
There is a proposal in the draft regulations to provide some protection. Where the employer and member enter into a redundancy agreement before the regulations are changed and the member leaves within 6 months of the regulations being changed the amendments would not apply.
In other words, for those covered by this there would not be an offset of the statutory redundancy pay against the pension strain cost.
The ceiling for the maximum discretionary severance payment would not be reduced for those covered by the proposed protection.
We support this saving provision however this a draft regulation and could be changed in the actual regulations.
UNISON has consistently and strongly opposed all the above changes since they were first proposed in 2015 and will continue to do so through any means available.
UNISON is engaging and responding to the MHCLG consultation arguing that severance should not be eroded
UNISON is completely opposed to offsetting the severance payments including Statutory Redundancy Pay against payments to remove reductions for pensions for those over 55. This is penal and potentially discriminatory.
Legal opinions are being obtained to see if this can be challenged and UNISON is asking the MHCLG to extend the consultation beyond 9 November to allow for meaningful discussion to take place and for the views of members to be heard.
As reported before those who think their pay service and age will mean that the removal of the early payment reduction may be restricted and who are in the middle of redundancy should consider asking their employer to make their date of leaving before 4 November the if at all possible.
MHCLG Consultation Worked examples
The following examples demonstrate the impact of the proposed reforms to exit payments on several hypothetical examples.
Under the reformed approach, members may also be awarded a cash payment where the pension strain is less than statutory redundancy pay. Members are also entitled to a cash payment where the pension strain (less statutory redundancy pay) is less than the discretionary severance pay members would have been entitled to. We’ve included any cash payments to member as “cash payment”.
- Individual 1: is 59 years old. Member for 19 years and is currently paid a salary of £29,000 per annum. She broadly fits the profile of the average member. Her new redundancy package does not contain a cash payment on top, as her pension strain is larger than the combined SRP and DSP. Member benefits are not affected by the £95,000 cap but are reduced under proposed reforms as SRP and DSP are no longer paid in excess to pension strain. Under the proposed reforms, benefits on redundancy are reduced by around 37%.
- Individual 2: is 55 years old and has been a member for 25 years. He is paid a salary of £80,000 per annum. His relatively young age means that he receives a high pension strain. Benefits are reduced under proposed reforms as SRP and DSP are no longer paid in excess to pension strain and pension stain is capped at £95,000. His new redundancy benefits are £95,000, as his pension strain is already over £95,000. Under the proposed reforms, benefits on redundancy are reduced by around 61%.
- Individual 3: is 61 years old. He has been a member for 31 years and is currently paid a salary of £41,000 per annum. Member is entitled to a cash payment as the DSP the member would have been entitled to is higher than pension strain (net of SRP). Member benefits are not affected by the £95,000 cap but are reduced under proposed reforms as full SRP and DSP are no longer paid in excess to pension strain. His redundancy benefits are reduced by 38%.
- Individual 4: is 65 years old. She has been a member 7 years and is currently paid a salary of £20,000 per annum. Member is entitled to a cash top up as pension strain is less than SRP, and DSP the member would have been entitled to is greater than strain (net of SRP). Member benefits are not affected by the £95,000 cap but are reduced under proposed reforms as full SRP and DSP are no longer paid in excess to pension strain. Under the proposed reforms, benefits on redundancy are reduced by around 25%.
- Individual 5: is 60 years old. She has been a member for 4 years and is currently paid a salary of £35,000 per annum. Her new redundancy package does not contain a cash payment element as her pension strain is larger than the combined SRP and DSP. Member benefits are not affected by the £95,000 cap but are reduced under proposed reforms as full SRP and DSP are no longer paid in excess to pension strain. Under the proposed reforms, benefits on redundancy are reduced by around 29%.
- Individual 6: is 67 years old and has been a member 23 years. She is currently paid a salary of £34,000 per annum. Her age and service history mean that there is no pension strain. The member is not affected by the £95,000 cap. Her redundancy package will be unchanged and will consist entirely of the cash payment which is equal to her original SRP plus DSP.