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. This document summarises the proposals as they relate to the local government pension scheme in England and Wales.

Who is covered?

The cap will eventually apply to all public sector employers but is to be implemented in two stages. Most scheduled LGPS employers (the major exceptions being Higher and Further Education) will be covered in the first stage.

What is covered?

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 a Local Government Pension Scheme (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 and payments made in compliance with an order made by a court or tribunal 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.

Applying the cap in 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. If the cap is exceeded and a pension strain payment cannot be made we understand that the policy intent is for the member to be forced to take a reduced pension.

This raises serious questions around the inequity of lack of choice as well as the situation of different strain costs between LGPS funds resulting in different amount of reductions being made for the same length of service and pay (currently strain cost is calculated at a local level based on the demographic make-up of the members in each fund). It also appears to be the intent to provide a facility for the member to buy out the reduction. However amendments to LGPS regulations would be required to facilitate this change, plus guidance from the Government Actuary on calculating the pension reduction and operating the buy-out process.

Relaxing the cap

There are circumstances, as set out in 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.

Employee and employer responsibilities

A person who receives an exit payment must inform any other public body 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.

Further details about the regulations, the consultation and how to respond can be found in the consultation documents and in the consultation briefing produced by the secretariat of then LGA's Local Government Pension Committee.