Reform of public sector exit payments likely to be delayed

New government regulations on further reform of exit payments are likely to be delayed, writes Prospect pensions officer Joe Anderton.

The Ministry of Housing, Communities and Local Government consulted on wide ranging reforms to local government exit pay last year.

This followed the government’s implementation of a cap on public sector exit payments through The Restriction of Public Sector Exit Payments Regulations 2020. These regulations have now been made and the cap came into force on 4 November 2020.

The public sector exit payment cap is an overall limit to the amount that an employer can pay to an employee, or to a pension scheme in respect of that employee, when they leave their employment.

What did MHCLG consult on?

MHCLG consulted on a wider reform of exit pay in local government that builds upon the £95k public sector exit cap. The consultation included changes to the LGPS regulations that remove 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 amendments to redundancy compensation payments that may be paid when individuals leave the local government workforce.

The current situation is that local government workers who are members of the LGPS and made redundant after the age of 55 are entitled to an immediate unreduced pension, statutory redundancy pay as well a severance payment under The Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2006.

The effect of the proposals is significant as an individual would no longer receive these benefits. Instead, they would receive statutory redundancy pay and one of the following options:

• LGPS benefits paid immediately but on a partially reduced basis, with no additional severance compensation; or,
• An immediate fully reduced pension plus severance in excess of statutory redundancy limited to £95k, or,
• A deferred pension plus severance in excess of statutory redundancy limited to £95k.

Prospect responded to the consultation expressing our disappointment in these proposals as they have a detrimental impact on all affected local government employees, not just those high earners whose exit payments would be over the £95,000 exit payment cap.

Prospect’s response to the consultation can be found here.

Are these changes coming into force?

It is important to note that at the time of writing (February 2021), the only regulations or legislation to be implemented are the £95k public sector exit payment cap regulations. The subject of this separate consultation was the reform of exit payments in Local Government, but these changes have not been introduced.

If a member’s total exit package is below £95k, they should be unaffected as these wider reforms are not yet in force.

The Restriction of Public Sector Exit Payment Regulations 2020 are subject to several legal challenges, including one from Prospect. These wider reforms of exit payments in Local Government have not been implemented and are unlikely to be until the legal challenges to the exit payment cap have been resolved. The legal challenges have received permission to be heard and the hearing is due to take place at the end of March 2021.

Unfortunately, we have already seen employers offering the new detrimental terms to employees when going through redundancy exercises, even where the total value of the exit payments is below £95k.

As stated, the wider reforms have not been implemented which means that if an LGPS member is made redundant, over the age of 55 and the total value of their exit is under £95k, they should be receiving an unreduced pension plus any severance payment that they are entitled to, i.e. their position is unchanged from before the exit payment cap was introduced.

Where conflict does exist is in a situation where a member is entitled to an unreduced pension but the total value of their exit, including the pension strain cost, is over £95k.

Currently the LGPS rules state that members over 55 must receive an unreduced pension if they are made redundant yet the exit payment cap regulations restrict employers from making severance payments that exceed £95k.

The LGPS rules therefore conflict with the exit payment cap regulations and we are in a period of legal uncertainty. Whichever route an employer follows, they could be subject to challenge as they will be acting contrary to one set of rules.

If you are going through a redundancy exercise and are impacted by these changes, please contact Prospect for assistance.