Public sector exit payments: impact on Local Government Pension Scheme

In August we provided an update on the Draft Restriction of Public Sector Exit Payments Regulations 2020, which can be found here. In summary, the regulations impose a £95,000 cap on exit payments in the public sector and have been introduced by the Government to prevent employers paying out large sums of public money to individuals leaving their employment. Further details have now been released by the Government including relating to the impact on the Local Government Pension Scheme (LGPS).

Impact of the regulations on the LGPS

For an in-depth analysis of the content of the regulations, please refer to our previous article which can be found here.

We are now aware that the regulations will come into force on the 4 November 2020 after being signed by Parliament on 14 October 2020.

One type of exit payment which falls under the regulations includes pension strain payments. Local government employees who are members of the LGPS may therefore be impacted. This is because, currently, individuals over 55 who retire due to redundancy, will receive their full LGPS benefits immediately. This is known as a pension strain payment as it impacts on the costs an employer was expecting to pay to that employee. The government have confirmed that it expects schemes such as the LGPS to be amended and brought up to date with the restrictions imposed under the regulations. As the £95,000 cap on exit payments includes pension strain payments arising from releasing pension benefits early, members of the LGPS will be especially affected. 

On 7 September 2020, a consultation was thereafter issued on the reform of exit payments in local government with the aim of assisting the effective implementation of the cap on exit payments. This consultation is open until the 9 November 2020 and can be found here. The current proposals for reform include, a maximum of 3 weeks pay per year of service, a maximum of 15 months pay on the amount of a redundancy payment and a maximum salary of £80,000 on which an exit payment can be based. it is also clear that the Government wish for members of the LGPS who are over 55 and have been made redundant to be able to choose whether to take their pension early or not.

Finalised guidance is required from the Government on how the LGPS and other schemes will be affected by the restriction on public sector exit payments and this is awaited

Implications for public sector employers

The regulations will be relevant for any employers making redundancies over the new few months. Employers should also be aware that if the employee is over 55 and in the LGPS the rules relating to pension strain are changing. As outlined above, changes to the LGPS are complex and advice should be sought if employers are unsure about the amount to be paid to employees following the introduction of the regulations.