Government backs down on exit payment cap after Prospect legal challenge

27 April 2021

Prospect pensions officer Joe Anderton gives an update on government’s decision, following pressure from trade unions, to revoke its proposed exit payment cap for public sector workers.

In November 2020, the government passed the Restriction of Public Sector Exit Payments Regulations 2020, which capped the amount that an employer could pay to an employee, or to a pension scheme in respect of that employee, when they left their employment. The cap was set at a level of £95,000.

Several trade unions, including Prospect, had challenged the legality of the exit payment cap and permission for a judicial review of the regulations was granted with a hearing due to take place in March 2021.

On 12 February 2021, HM Treasury published revised directions and guidance that immediately dis-applied the cap and subsequently regulations have been passed which formally revoke the exit cap.

The government stated in the guidance that: “After extensive review of the application of the Cap, the Government has concluded that the Cap may have had unintended consequences and the Regulations should be revoked.”

What impact does this have on the MHCLG consultation regarding the reform of local government redundancy terms?

In September 2020, the Ministry of Housing, Communities and Local Government (MHCLG) consulted on a wider reform of exit pay in local government that incorporated the £95k public sector exit cap.

The consultation included changes to the Local Government Pension Scheme (LGPS) regulations that would have removed the automatic entitlement for members to receive an unreduced pension upon redundancy if they are over the age of 55.

The proposals included additional unnecessary changes to the LGPS as well as limits to redundancy compensation payments that may be paid when individuals leave the local government workforce.

Following the revocation of the exit cap regulations, MHCLG have confirmed that the consultation on reforming local government exit pay is now considered closed and there will be no changes made to Local Government pensions or redundancy terms without a further, separate consultation.

What should I do if my exit payment was capped?

Although the public sector exit payment cap was only in force for a short time, during that period a significant number of people would have left the local government workforce and potentially had their pension or redundancy payment restricted.

If a member’s exit payment or pension was restricted in any way in the time that the cap was in force, they should now receive the amount they would have received had the cap not been in place.

HM Treasury state in their guidance that as the cap has now been dis-applied, their expectation is that employers will pay former employees with an exit date between 4 November 2020 and 12 February 2021 (the period that the cap was in force) the sums that would have otherwise been paid to them had it not been for the cap.

If you were affected by the cap and require assistance, please contact Prospect.

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