Implications of the cap on the Local Government Pension Scheme
Restriction of Public Sector Exit Payment Regulations 2020
On 4 November 2020, the Restriction of Public Sector Exit Payment Regulations 2020 came into force (Regulations).
The Regulations impose a £95,000 cap on the amount that public sector bodies can pay to an employee on the termination of their employment. The following schools are included in the Schedule of the Regulations, setting out which organisations are required to comply with the cap:
- Academy schools - including non-maintained special schools
- Community and special schools
- Pupil referral units
- Maintained nursery schools
- Voluntary controlled schools
- Foundation schools - including foundation special schools
- Some non-maintained schools
- City technical colleges and city colleges for the technology of the arts in England
What do the Regulations mean?
The Regulations set out which payments are within the scope of the £95,000 cap. These include:
- Redundancy payments
- Severance payments
- Pension strain payments
- Compensation payments through ACAS
- Payments made as a consequence of loss of employment, whether under a contract of employment or otherwise
- Payments made in lieu of notice under a contract of employment that exceed one quarter of the payee's annual salary
The total of all exit payments falling within the scope of the cap must not exceed £95,000.
The Regulations give powers to ministers to relax the cap in certain ‘exceptional’ circumstances, and where it is 'necessary or desirable’ and we await further guidance on when this might apply.
There are some circumstances where a waiver will be mandatory, for instance where an obligation to make an exit payment arises out of:
- a TUPE transfer;
- discrimination proceedings; and
- whistleblowing proceedings.
Unfair dismissal and health and safety related detriment claims shall also be added to this list in due course.
Pension Strain Payments and the LGPS
Payments made to reduce or eliminate an actuarial reduction to a pension on early retirement (known as pension strain costs) fall within the scope of the Regulations. As such, they must be included when checking the total value of exit payments made to an employee.
Where the total value of all exit payments within the scope of the Regulations are above £95,000, an employer must consider whether any elements of the exit payment can be reduced. Please note, statutory redundancy payments must be paid in full.
If the total exit payment is over £95,000 when just the pension strain, statutory redundancy payment and any other payments you are obliged to make remain, there is a conflict between the exit cap regulations and the LGPS regulations. The LGPS regulations still require the member to take payment of an unreduced pension, but the exit cap regulations prevent the employer from paying the full strain cost.
When faced with this conflict, employer's should notify the LGPS administering authority of any employees who are subject to the cap (including the pension strain costs) prior to their exit.
The LGPS Regulations are expected to be amended early next year to bring them into line with the Regulations. They are currently undergoing consultation. To participate in the consultation process, please click here.
If you think that your school may be in a situation where it will be directly affected by the conflict between the Restriction of Public Sector Exit Payment Regulations and the LGPS Regulations, please get in touch and we would be happy to discuss options.
Position Statement: Here
LGPS Advisory Board Commentary and Advice: Here