Following regulations being laid over the summer implementing a cap of £95,000 on exit payments for public sector employees, the Ministry of Housing, Communities and Local Government (MHCLG) is consulting on the impact of the proposed reforms to exit payments made to local government employees. This includes changes that will affect redundancy payments and the early retirement terms available on redundancy.

You can read a copy of the consultation document here. The consultation will close on 9 November 2020.

Key action points

1. Review how these changes may affect your business and resource planning

Whilst the changes to the possible range of exit terms are still at the consultation stage, the exit cap is anticipated to come into effect towards the end of this calendar year. The exit cap will apply to all exit payments associated with loss of employment, although the local government consultation is focussed primarily on redundancy issues. This means that the changes may affect employee exits anticipated before the end of the fiscal year.

For Local Government Pension Scheme (LGPS) employers whose workforce includes individuals who have transferred from local government under one or more service contracts, employers will need to review how the proposed regime will affect those employment terms, if at all. Those employers should also consider the extent to which they will be required to have regard to the principles of exit payment caps, either as a result of their service contract with the local authority or wider legal obligations.

2. Communications

The proposals in relation to older employees who would automatically take an immediate pension under the current legislation are likely to involve some complex choices for those individuals. We anticipate such individuals are likely to need specialised financial advice to understand the relative merits of different elements of their redundancy package and the impact on their future pension of any particular course of action.

Decisions made as a result of these choices will have long-term ramifications for individuals' retirement and future financial health. In light of the focus in regulating private sector pensions to promote high quality communication and informed financial decision-making to support the policy of member choice, in giving LGPS members these choices there also needs to be systemic measures in place to enable timely and well communicated support for individuals making decisions that will affect their financial health in retirement. This raises the question as to whether access to independent financial advice will be required for member and who will pay for it.

3. Consider responding to the Consultation

The consultation is aimed at understanding the impact these changes may have on the local government workforce and the effect the changes will have on the regulations currently governing exit pay and early retirement terms. It is primarily a consultation to seek information about impact the proposals will have. It is not a consultation about the wider policy of exit pay reform.

Background to the Consultation

The consultation is part of the wider pack of reforms to public sector exit payments, which was initiated by the 2015 Spending Review. The ultimate measures that are put in place through secondary legislation will underpin the implementation of the £95,000 cap on the total value of exit packages.

How will LGPS be affected by these changes?

The key proposed changes for LGPS pension benefits are:

  • the removal of mandatory early retirement following redundancy where the member is aged 55 or over; and
  • the provision of options for employees as to how and when they take their pension benefits following redundancy.

The proposals will require employees to carefully consider the advantages and disadvantages of different elements of their redundancy package as where an employer pays additional pension costs, an employee may no longer be entitled to receive any discretionary redundancy payments.

The proposals set out the following proposed reforms to early retirement terms:

  • Where a member wishes to retire the "strain" cost of that early retirement will need to be assessed against the £95,000 cap on the total value of any exit package.
  • Where the member has received redundancy payments (including statutory redundancy payments) or benefitted from his employer purchasing additional pension, those amounts will reduce the available amount of the exit payment cap that can be paid by the employer to fund the costs of the early retirement pension.
  • Where an employer pays any amount of pension strain cost, the employer may not pay a discretionary redundancy lump sum, except in circumstances where the discretionary redundancy payment would have been greater than the pension strain costs.
  • Where the strain costs are greater than can be provided within the cap value, there will be an option for members to "buy" out the additional early retirement costs, with the member meeting that amount from their own resources. It is unknown at this stage whether the pricing of early retirement costs will be prohibitively costly such that it is may not represent a viable choice for any but a small minority of members.
  • Where the additional pension costs are not met, the member will have the option of an actuarially reduced early retirement pension or to become a deferred member of the LGPS.
  • MHCLG will provide for actuarial guidance in calculating strain costs to ensure consistency across LGPS Funds.

Redundancy compensation payments

MHCLG is proposing that the calculation of redundancy compensation payments is subject to certain maximum tariffs or values including a maximum salary on which a redundancy compensation payment may be based, a maximum number of months' or weeks' salary that can be paid and a maximum multiple of pay per year of service. The consultation acknowledges that employers will retain a discretion to apply lower limits / calculation factors.

Re-engagement of LGPS pensioners

Local authorities may have recently reviewed their policies as a result of COVID-19 and re-engaging former retired health and social care workers to ensure sufficient capacity to deliver key services during the pandemic. The reform proposals will require local authorities to consider their pay policies and their pensions' abatement policies for ex-employees who are re-engaged whilst in receipt of a LGPS pension.

What does this mean for now?

For the moment, there is no immediate action for employers to take. However, public sector employers and those employers participating in the LGPS will need to review their policies and procedures when the detail of the changes become available and consider the impact of employee choice for those aged 55 or over.