Public sector exit payments & changes to redundancy packages

Please note, as of 12 February 2021, the Government has concluded that the Cap may have had unintended consequences and, as such, the regulations have been revoked in their entirety. You can read the full update from HM Treasury here.

The Restriction of Public Sector Exit Payments Regulations 2020 came into force on 4 November 2020. The Regulations place a cap of £95,000 on the pre-tax aggregate value of exit payments made to public sector workers, in order to prevent large pay-outs being made using public money.

The legislation was passed in 2015, enabling the Government to make Regulations to impose the cap, but it has been significantly delayed.

A list of public bodies can be found in the schedule at the end of the Regulations. The cap applies to Academies and Maintained Schools but does not apply to Independent Schools.

In addition to the exit payment cap, the Ministry of Housing, Communities and Local Government (MHCLG) launched a consultation on changes to the Reform of Discretionary Compensation Payments Regulations and Local Government Pension Scheme Regulations. The MHCLG consultation commenced on 7 September 2020 and ended on 9 November 2020. The consultation covered the required changes to the Local Government Pension Scheme (LGPS) in order to implement the £95K exit payment cap (where pension strain costs mean the exit package is over £95,000) and the public sector exit payments further reform proposals issued in 2016. The latter looked at obtaining consistency in exit payments across the public sector and setting a standard cap on these.

This means that the cap came into force on 4 November 2020 but the required changes to the Local Government Pension Regulations, as a result of the cap, have not yet been made and are likely to be changed in early 2021.

The changes to the LGPS Regulations and the further reform proposals are significant and will greatly affect the packages in schools and academies. Further information will be issued once both Regulations are in place, but an outline is provided below.

The Restriction of Public Sector Exit Payments Regulations 2020

What is included within the £95,000 cap?

Exit payments include redundancy payments (including statutory redundancy payments), severance payments, pension strain costs, and any other payments made because of termination of employment.

However, payments relating to flexible or phased retirement, ill-health retirement, death in service, pay in lieu of annual leave and payments in lieu of notice (where they do not exceed a quarter of an employee’s salary) are not covered by the Regulations.

Will the cap increase with inflation?

There is no intention to index the cap although it will be kept under review.

How is an employee’s pension affected?

The guidance states ‘Payment or elements of payments that result from an individual’s accrued right to a pension, including additional pension purchased with the individual’s own monies are not exit payments for the purpose of the cap’. This means early payments for any reason other than on redundancy or business efficiency grounds will not be affected.

How will the cap be applied?

The Regulations state that 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.

Is there any flexibility with applying the cap?

The Government recognises that it may be necessary to relax the restrictions imposed by the cap, however, this will only be in exceptional circumstances. There are circumstances where it will be mandatory that the cap be relaxed and there are circumstances where the relaxation is discretionary.

Mandatory circumstances are:

Where a payment is made as a result of the application of the TUPE Regulations.
Where a payment is made to avoid tribunal litigation as a result of a whistleblowing complaint involving detriment or dismissal. Legal advice would be required to show that settlement is appropriate.
Where a payment is made to avoid tribunal litigation in relation to a complaint that someone has suffered a detriment/been dismissed as a result of carrying out activities in connection with preventing or reducing risks to health and safety at work. Legal advice would be required to show that settlement is appropriate.
Where a payment is made to avoid tribunal litigation as a result of a complaint of discrimination under the Equality Act. Legal advice would be required to show that settlement is appropriate.

Discretionary circumstances are:

There are compassionate grounds owing to genuine hardship.
It is necessary to exit an employee to give effect to urgent workplace reforms.
An arrangement to exit was agreed before the regulations came into force but the exit was delayed until after the date and the delay is not attributable to the employee.

Who has the authority to relax the restrictions?

The Local Authority (full Council) where they are the employer, and then further approval still needs to be sought from MHCLG in mandatory cases. For discretionary cases, this would be the MHCLG and the Minister, prior to it being submitted to HM Treasury for approval. We are awaiting guidance on whether powers to relax the restrictions will be passed onto Academies.

The business case can be found in Annex A of the HM Treasury guidance.

Public sector organisations are expected to publish information about any decisions to relax the cap. The Government strongly recommends that this be published in the annual accounts.

If an employee receives an exit payment, what time period needs to elapse before they can receive any further exit payment?

The Regulations refer to a 28-day period, and the guidance gives the following example:

An employee leaves the employment of Authority A and receives an exit payment of £50,000. He then leaves Authority B within the next 28 days. Authority B should not make a payment in excess of £45,000.

What obligations are there for the employee to inform their employer about any exit payments they have received?

Where an employee receives an exit payment and is employed/holds office with one of the prescribed authorities then the employee should inform the other employer of the following in writing:

they are entitled to receive an exit payment
the amount and type of that exit payment
the date they left employment/office
the identity of the relevant authority that made that payment.

What is the importance of the Local Government Pension Scheme Regulations not being finalised before 4 November 2020?

As it stands, an employee who is a member of the LGPS and is 55 or over is able to access their pension if they are made redundant. The pension is unreduced. In such situations, there is usually a pension strain cost to the employer in order to allow the employee to have an unreduced pension. In some situations, the redundancy package including pension strain costs may be over £95,000 and this would now conflict with the exit cap. However, because the Pension Regulations haven’t been amended, it means the employer (Academy/Local Authority) cannot force a reduction in pension.

What should schools/academies do where an exit over £95,000 (with pension strain costs) takes place after 4 November 2020, but before the new Local Government Pension Scheme Regulations comes into force?

The Local Government Association has produced guidance to assist scheme employers, it contains a step-by-step guide available through the following link: http://lgpslibrary.org/assets/gas/ew/ExitCap_Erv1.0.pdf.

Where a waiver is not being applied and the exit payment will be above £95,000 with pension strain, there are two options:

Consider whether any of the payments you are required to make can be reduced (e.g. contractual redundancy pay), so that the exit cap can be adhered to, although this is not without challenge.
Pay a cash alternative to the employee with a deferred pension, although the Scheme Advisory Board advises against this and advises legal advice is obtained. A letter from MHCLG to LAs suggests an actuarially reduced pension or deferred pension holds less risk.

Should Schools/Academies find themselves with an exit package in excess of £95,000 please contact EPM for advice.

Are Teachers’ Pensions affected?

Teachers’ Pensions is different, in that it is not an entitlement to have an unreduced pension when exiting on redundancy/business efficiency grounds, although employers can choose to do this in their Pension Policy. It is not yet known, however, whether Teachers’ Pensions intend to amend their regulations relating to their mandatory or discretionary compensation arrangements for premature retirement.

What changes do schools/academies need to make as a result of the cap?

Schools/academies should keep records of all exit payments so that they can demonstrate that they are under the exit cap or that an appropriate waiver had been obtained.

Our advice at this stage is for schools/academies not to make any changes to their Redundancy Procedures or Pension Policies until the changes are made to the Reform of Discretionary Compensation Payments Regulation and the LGPS Regulations.

Will there be changes to the pension forms that employers have to complete in order for an employee to access their pension where there has not been a reduction?

Yes, this will be the case as the employer must inform the LGPS administering authority whether or not an employee is capped, where they leave on grounds of redundancy and are age 55 or over so we will see some changes. To date, we have seen somewhere they have made changes to the leaver's forms that the employer completes or additional declaration forms have been produced. Further details will follow.