Public Sector LGPS Exit Payments Cap comes into force on 4th November 2020

In 2015 the Government first announced that it proposed to prohibit six-figure exit packages from the public sector, by imposing a £95,000 cap on such packages. Following public consultation at that time, the introduction of such legislation has been subject by many delays.

New legislation approved before the end of consultation!

Despite the fact that the most recent public consultation period does not close until 9th November 2020, draft Regulations are already in place. The Parliamentary process and was signed into law late on 14th October 2020 meaning that the Regulations, and therefore the exit payment cap of £95,000, will come into force on 4th November 2020.  

The consultation therefore does not conclude until after the legislation comes into effect.

What this means from 4th November 2020

Where someone retires due to redundancy or business efficiency and are aged 55 or over, they currently must receive their LGPS benefits in full and with immediate effect. That unreduced immediate payment has an added “strain” cost to the employer over and above what the fund had assumed would be payable to the member. Strain costs must be counted towards the £95,000 cap.

What are the practicalities of this?

• It may be prudent not to avoid producing any illustration on redundancy/efficiency grounds beyond Tuesday 3 November 2020;
• If the overall package is below £95,000 then benefits can, as now, be paid in full, but only if the member chooses in effect to give up their redundancy pay;

• If the overall package exceeds the cap then the strain cost needs to be addressed, with the member having various options, including:

1. LGPS benefits still being paid immediately but on a reduced basis, with no additional compensation;
2. LGPS benefits being paid in full, with the member choosing to take less lump sum compensation;
3. LGPS benefits being deferred until normal pension age, where they would be paid unreduced and the individual instead receiving lump sum compensation within the cap limits.

• Regardless of whether the exit cap applies or not, the member is in effect forced to choose which of the following they wish to give up Statutory Redundancy Pay, full pension, and immediate payment (they cannot have all three as they do now). If they take SRP they must either have a reduced pension or defer pension until normal pension age; if they wish immediate full pension they must give up Statutory Redundancy Pay.

What is still unknown?

The practicalities above are specific to LGPS. There is no current information that is publically available regarding the impact for all other public sector pension schemes.

Neither the guidance nor directions to accompany the regulations have been published. This means there is no further information regarding the waiver process or provision for current exits in progress.

We will update further when more information is known.