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Update 9.11.2020 Information for administering authorities published

The lgpsregs.org website now includes Exit cap information for LGPS administering authorities. This document seeks to set out the decisions which authorities need to take as a result of the exit cap regulations coming into force. It also provides a step by step guide for revising their processes and liaising with scheme employers.

Update 5.11.2020 Information for scheme employers published

The lgpsregs.org website now includes Exit cap information for LGPS employers. This document seeks to guide employers step by step through their obligations and decisions under the exit cap regulations now in force. In particular it sets out the risks of making a cash alternative payment before any decision is made regarding the pension or the outcome of any potential litigation concerning it is known.

Update 30.10.2020 Exit payments interregnum - Commentary on legal advice

Update 30.10.2020

Exit payments interregnum - Commentary on legal advice

1. This commentary considers the position of LGPS administering authorities when a scheme member aged 55 or over who would, apart from the bringing into of force of the Public Sector Exit Payments Regulations 2020 (the Exit Cap Regulations) on 4th November 2020, qualify for an immediate unreduced pension under regulation 30(7) of the Local Government Pension Scheme Regulations 2013 (the LGPS Regulations). For the avoidance of doubt this commentary only applies to capped scheme members, those not subject to the cap should continue to receive unreduced pension benefits under regulation 30(7).

2. LGPS administering authorities and scheme employers should take their own view as to the course of action they take and in doing so may wish to seek their own legal advice. This commentary is designed to assist LGPS administering authorities and scheme employers in considering what action to take and what legal advice they may deem appropriate. It is not in itself legal advice nor an instruction to act in any particular manner.

3. Notwithstanding the above it is the Scheme Advisory Board's (the Board's) opinion that in the circumstances set out in in paragraph 1 the course of action presenting the least risk to both LGPS administering authorities and scheme employers is for the;

  • LGPS administering authority to offer the member the opportunity to take a deferred benefit under LGPS regulation 6 or a fully actuarially reduced pension under LGPS regulation 30(5)

  • Scheme employer to delay the payment of a cash alternative under regulation 8 of the Exit Cap Regulations

In the view of the Board this scenario allows for the maximum flexibility for both the LGPS administering authority and the scheme employer to minimise the financial risk which will result from the inevitable challenge from the scheme member denied what would appear to be their right to an unreduced pension under LGPS regulation 30(7).

4. This commentary refers to the written opinions of counsel obtained on the 6th and 20th October 2020 as well as a further advice following a discussion on the interpretation of regulation 8 of the Exit Cap Regulations received by email on 24th October 2020.

5. At the time of drafting this commentary HMT guidance, and Directions on the power to waive the cap, had just been received. These are currently being reviewed in detail and further information can be found on the LGA position paper on exit cap regulations, guidance and directions.

6. This commentary relates to the known situation as at 30th October 2020, developments after that date will be addressed in subsequent updates.

The position for LGPS administering authorities and scheme employers from 4th November 2020

7. The Exit Cap Regulations restrict the strain payment (along with any other payments defined as an exit payment by these regulations) made by the scheme employer under LGPS regulation 68(2). However, while scheme employers determine the reason for the exit, the level of pension payable to a member is solely the responsibility of the LGPS administering authority (LGPS regulation 72(3)).

8. The LGPS Regulations do not appear to contain a clear conditional linkage between the payment of a strain cost under regulation 68(2) and the scheme member' right (and indeed obligation) to receive an immediate unreduced pension under regulation 30(7) resulting in a request by the LGPS administering authority for a strain cost from the scheme employer.

9. Amendments will be made to the LGPS Regulations (currently under consultation) to address capped strain costs and introduce partly reduced pensions, but these are not anticipated to be in force before the end of 2020 and possibly early 2021.

10. In a letter dated 28th October 2020 from MHCLG Minister, Luke Hall, to Chief Executives of Councils and LGPS administering authorities , the government set out its view that the Exit Cap Regulations effectively curtail the use of LGPS regulation 30(7) to pay an immediate unreduced pension when the cap is breached. Therefore, a capped member should only receive an immediate pension under LGPS regulation 30(5) (with full actuarial reductions applied) or a deferred pension, plus a cash alternative payable by the employer under regulation 8 of the Exit Cap Regulations.

11. LGPS administering authorities would therefore appear to be in the position of not acting in accordance with either the government' view or the LGPS Regulations. At the same time, scheme employers appear to be in the position of being asked to make a potentially sizeable cash alternative payment when it is uncertain if a strain cost request from the LGPS administering authority may also be forthcoming.

Considerations for administering authorities

12. In considering the appropriate course of action once the Exit Cap Regulations are in force, an LGPS administering authority will need to assess the level of risk of successful challenge it could face. Unfortunately, there does not appear to be any course of action which does not result in the risk of challenge and as such, clarity may only be achieved once a challenge has been resolved through the courts.

13. According to the advice given to the Board by counsel (James Goudie QC 6th October 2020), not paying a pension under LGPS regulation 30(7) represents a high risk of successful challenge.

14. According to the same advice this risk could be mitigated to moderate if the government' view is followed and a cash alternative is paid by the scheme employer under regulation 8 of the Exit Cap Regulations, plus a fully reduced pension under LGPS regulation 30(5) or an award of a deferred pension.

15. However, if a cash alternative is paid and the LGPS administering authority subsequently loses a challenge, then the result could be the enforced payment of an unreduced pension on top of the cash alternative. Additionally, the LGPS administering authority may be unable to recoup any strain cost, due to the scheme employer having reached the maximum payable under the Exit Cap Regulations.

16. Alternatively, if the LGPS administering authority pays an unreduced pension under LGPS regulation 30(7), they will not be acting in accordance with the government' view and may also be subject to a challenge on the grounds of ' repeal'. Implied repeal suggests that LGPS regulation 30(7) is curtailed as a consequence of the Exit Cap Regulations coming into force.

17. Although the advice given to the Board (James Goudie QC 20th October 2020) does not agree that the requirements for implied repeal have been met, that advice does not remove the risk of a challenge, which if successfully brought could result in the LGPS administering authority being found to have acted ultra vires and having to seek to reclaim the pension.

18. Given that clarity may only emerge following a challenge, the prudent course may be for the LGPS administering authority to state their intention to, and in the event of termination, offer the member a deferred pension or pay a fully reduced pension under LGPS regulation 30(5) and for the scheme employer to delay making any cash alternative payment until the inevitable claim is settled.

19. If the result of the claim is an order to pay an unreduced pension under LGPS regulation 30(7) the LGPS administering authority can then put the unreduced pension into payment and request a strain cost from the scheme employer.

20. If, however, the result of the claim is that LGPS regulation 30(7) is indeed overridden by the Exit Cap Regulations then the member can be paid a cash alternative by the scheme employer in addition to a fully reduced pension (or deferred pension) payable by the LGPS administering authority.

Considerations for scheme employers.

21. Scheme employers listed in the schedule to the Exit Cap Regulations are subject to the exit cap and cannot pay a combination of exit payments as defined by those regulations in excess of £95k. Pension strain is defined as an exit payment under regulation 5(2)(b) of these regulations.

22. Although the risk of challenge set out in the legal advice received by the Board relates to LGPS administering authorities, there are also risks which should be considered by other capped scheme employers.

23. To ensure that employees who are not subject to the cap continue to receive an unreduced pension, employers must notify the LGPS administering authority of any employees who are subject to the cap (including strain cost) prior to the exit.

24. Should a scheme employer pay a cash alternative under regulation 8 of the Exit Cap Regulations and the same employee is successful in a challenge against the LGPS administering authority, then the LGPS administering authority will no doubt request a strain payment to cover the cost of putting an unreduced pension into payment.

25. In this situation, and depending on the amount of any cash alternative and other exit payments that have been made, the scheme employer may not be able to pay all or any of that strain cost as a result of the restrictions set down in the Exit Cap Regulations.

26. Where strain payments are not made at all or in full, the cost of unreduced pensions resulting from successful challenges will have to be met via increased scheme employer costs for all scheme employers within an LGPS Fund. There is therefore a risk that scheme employers could find themselves making cash alternative payments plus having to meet the increased scheme employer costs brought about by unfunded unreduced pensions.

27. Payment of a cash alternative to the scheme member will incur income tax and employer National Insurance Contributions (on the total of all termination payments in excess of £30,000).

28. HMT guidance (paragraph 4.4) states that a cash alternative may be paid to the scheme administrators. Following an unsuccessful challenge, a scheme member who receives a reduced pension may have preferred for the cash alternative to be paid into the LGPS in order to purchase additional pension rather than receiving it as cash. This will not be possible if the cash alternative has already been paid to the member.

29. It may therefore be prudent for a scheme employer to delay making a cash alternative payment until such time as the position is clarified following a challenge. The scheme employer must of course pay to the employee any exit payments due under statute and will need to take a view, and potentially take legal advice, on whether any other payments could be lawfully delayed until clarification is received to enable the maximum amount to be available for a strain cost.

30. With regard to the ability of scheme employers to make a part payment of a strain cost under regulation 8 of the Exit Cap Regulations, James Goudie QC confirmed by email on Friday 23rd October 2020 the following;

..notwithstanding the obscurities and oddities of Reg 8 of the Exit Cap Regulations, even if an employing authority cannot lawfully from 4 November 2020 pay to the LGPS Fund the amount by which the pension ' cost' exceeds the £95K cap, it at least can pay a strain cost up to the cap. If the amount of the strain cost means that the cap is exceeded that does not prevent the employer from paying strain cost at any rate up to the amount of the cap.

Update 28.10.2020 Letter from MHCLG

Update 28.10.2020

A letter has been sent from the Local Government minister to all LGPS administering authorities , in respect of the implementation of the £95k cap from 4th November. The Board has also been sent a copy of the letter and are considering its contents alongside legal advice it is currently obtaining on this matter. Once HMT guidance and directions on the cap are published (expected to be later this week) the Board will publish the legal advice together with a commentary for administering authorities and scheme employers.

Update 21.10.2020 Legal advice being sought

Update 21.10.2020

The Restriction of Public Sector Exit Payments Regulations 2020 (‘the Cap Regulations’), will come into force on 4 November 2020, in advance of the changes to LGPS regulations proposed by MHCLG in the further reform consultation. These changes will amend the LGPS regulations to provide for the payment of reduced pensions in whole (as is the current provision) and in part.

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 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.

The Board has received initial advice but has followed this up with requests for further clarification on which they hope to have by early next week. Once that is received and subject to the necessary HMT guidance and Directions being made available, the Board intends to publish the advice along with some commentary.

The Board appreciates that there is significant uncertainty at this time, hence why it felt legal advice would be important before anything further was published on this matter.

Update 15.10.2020 Exit cap regulations made

Update 15.10.2020

The legislation implementing the £95k cap on exit payments has now been signed and comes into force on 4 November 2020. We are still awaiting the Guidance and Directions to accompany the regulations; these will set out the discretionary waiver process and the position of exits agreed before 4 November where the date of leaving is after. We understand these are expected next week.

You will be aware that MHCLG have opened a consultation seeking views on proposals for further reforming exit payment terms (see below). The consultation proposes changes to the LGPS regulations in order to accommodate the £95k exit payment cap. It also proposes a limit on cash severance payments and for the strain cost to be reduced by the value of any statutory redundancy payment made.

Clearly the amendments to the LGPS will not be in place when the £95k cap comes into force. We have made both HM Treasury and MHCLG aware of the predicament this puts local government employers and LGPS administering authorities in. We understand that MHCLG will be issuing a statement on this in the next 7-10 days. In the meantime the SAB is obtaining legal advice as to the risk of challenge to LGPS authorities during this period which will be published in good time for the 4th November.

Please note, in the period between 4 November and the date the LGPS regulations are amended:

  • only exits where the cost exceeds the £95k cap will be impacted
  • the statutory guidance on standard strain cost will not be effective i.e. you will continue to calculate strain cost on a local basis
  • the proposals in the MHCLG consultation around limiting cash severance payments and the strain cost being reduced by the value of any statutory redundancy pay will not apply

 

We will keep the news and updates section of www.lgpsregs.org updated with the latest news so please check it regularly for the latest position.

Changes to legislation

Changes to legislation

Exit payment regulations

The government first announced plans to cap exit payments in the public sector in 2015. On 10 April 2019 HM Treasury (HMT) launched a consultation on draft regulations, guidance and Directions to implement the cap. HMT published its response to the consultation on 21st July 2020. 

MHCLG consultation on further reform of exit payments

In addition to the £95k exit payment cap MHCLG has launched a consultation on changes to the Local Government Pension Scheme (LGPS) and Discretionary Compensation Regulations. The consultation covers the required changes to compensation and pension regulations to implement both the £95K exit payment cap and the public sector exit payments further reform proposals issued by HMT in 2016. 

The latter proposals were left to individual departments to implement rather than being via central HMT Directions.  At this stage there have been no proposals to implement an exit payment recovery process that was also consulted on in 2015. The MHCLG consultation closes on the 9 November. Currently no other part of the public sector has any ‘live’ proposals to enact the further reform proposals.

Q&A

Q&A

This Q&A summarise both the £95K cap and further reform proposals as they relate to the Local Government Pension Scheme (LGPS) in England and Wales and questions marked* have been updated in the light of the HMT regulations. Further details about the guidance and directions to implement the cap will be made available as soon as they are made available.

Who is covered by the cap and proposed changes to compensation regulations?*

Employees of all local authorities are covered by both the cap and compensation regulations, so employees will see a range of limitations to scheme redundancy benefits. There will also be LGPS scheme employers who are not covered by either the cap or compensation regulations where employees will see different outcomes.

HMT regulations set out the bodies covered by the £95k cap – ‘capped employers’ - while revised compensation regulations (as yet unpublished) will set out the bodies covered by the further reform changes – ‘reform employers’. Some scheme employers will be both capped and reform employers but others will fall into one or neither camp. Due to the timing of the HMT regulations there will be a period from 4th November when employers are covered by the cap but not yet by the revised compensation or pension regulations.

What is covered by the further reform proposals in the MHCLG consultation?

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
  • The amount available for any strain cost will be reduced by the statutory redundancy payment

What is covered in the cap?

The exit payment cap is set at a total of £95,000 with no provision for this amount to be index-linked. Exit payments include redundancy payments (including statutory redundancy payments), severance payments, pension strain costs – which arise when an LGPS pension is paid unreduced before a member’s normal pension age – and other payments made as a consequence of termination of employment.

The cap applies to all exit payments that arise within a 28 day period and the regulations cover the process to follow if an individual has multiple exits from public sector employment within 28 days.

What isn’t covered?

Payments related to death in service or ill health retirement, pay in lieu of holiday,  payments made in compliance with an order made by a court or tribunal and payments in lieu of notice that do not exceed a quarter of a person’s salary are not exit payments for the purposes of these regulations.

Although statutory redundancy is included as an exit payment it cannot be reduced. If the cap is exceeded, other elements that make up the exit payment must be reduced to achieve an exit payment of £95,000 or less.

Will the cap be indexed?

Proposals for the cap were first published in 2015. If the cap had been indexed by CPI since then it would now be in excess of £110K. There is however no intention to index the cap although the response states that it will be kept under review.

When will the cap and further reform proposals come into force?*

Cap regulations have now been made and will come into force on the 4th November. It is understood that MHCLG changes to LGPS and Compensation regulations will not come into force before the end of the calendar year.

Applying the cap and further reform to the LGPS

The major impact of the regulations will be on LGPS members aged 55 or over who currently qualify for an unreduced pension because of redundancy or efficiency retirement as well as a severance payment under The Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2006.

Once both the cap and further reform is in place for members whose employers are both capped and subject to further reform the effect of the proposals will be significant as they would receive statutory redundancy pay and one of the following options:

  • An immediate actuarially reduced pension calculated using a strain cost reduced by the amount of the statutory redundancy payment and capped at £95k. In this case no severance is payable; or,
  • An immediate fully reduced pension (no strain cost to the employer), plus statutory redundancy pay plus severance in excess of statutory redundancy limited to £95k, or,
  • A deferred pension (no strain cost to the employer), plus statutory redundancy pay plus severance in excess of statutory redundancy limited to £95k.

However in the period between 4th November and prior to revised pension and compensation regulations being in place the only change will be the application of the cap to strain costs.

Will the strain cost be calculated in the same way as now?*

Currently the strain cost for an early payment of pension is calculated by each LGPS fund. This is of no concern to employees at present as a full pension is paid regardless of any differential in cost. Under the new proposals, strain costs that are capped result in reduced pension and therefore any differential in strain costs across funds would lead to different outcomes for scheme members.

The MHCLG consultation proposes that a standard methodology is to be used to calculate strain cost across all funds in respect of capped employers, but that some flexibility will be available when calculating strain costs for non-capped employers. Use of the standard strain cost may have implications for employer contributions at the following valuation depending on its relationship to the actual liability impact on the particular employer as calculated by the fund actuary.

However standard strain cost calculations will only come into force with revised pension regulations. Until that time existing strain cost calculations should continue to be used when calculating if strain costs should be capped.

How might the cap and further reform affect members of different scheme employers?

We are still seeking clarity on this point which will not become completely clear until new compensation and LGPS regulations are published however our understanding is as follows:

  • Employees of ‘reform employers’ who are aged under 55 or not in the LGPS will be subject to the severance restrictions in the same way as those of local authority employees. However, such payments may or may not be subject to the cap, depending on the status of the employer under HMT regulations relating to the £95k cap.
  • Members of the LGPS aged 55 or over who are not employees of ‘reform employers’ but who are employees of ‘capped employers’ will not have their strain cost reduced by the statutory redundancy payment but it will be capped at £95K. They will have the three options set out above (ignoring the reduction to the strain cost in the first option)
  • Members of the LGPS aged 55 or over who are employees of ‘reform employers’ but who are not employees of ‘capped employers’ will have their strain cost reduced by the statutory redundancy payment but it will not be capped and they will not have the three options set out above.
  • Members of the LGPS aged 55 or over who are not employees of ‘reform employers’ or employees of ‘capped employers’ will not have their strain cost reduced by the statutory redundancy payment or capped and they will not have the three options set out above.

 Relaxing the cap

There are circumstances, as set out in draft HMT Directions, when the cap must be or may be relaxed by a minister or the authority. However, most are subject to consent by HM Treasury even if passed by full council. Employers are required to record and publish information about any decisions made to relax the cap. There will be a different process for Welsh councils where consent for a waiver will come from Welsh ministers rather than Westminster.

Employee and employer responsibilities

A person who receives an exit payment must inform any other public body covered by the regulations that employs them about that payment. An employer must ensure that any exit payment does not exceed the cap (unless permitted by the relaxation directions) and, where a non-compliant payment is made, recover any overpayment subject to a value for money assessment.