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Last updated: 13 January 2021


 

Exit credits policy

Background

In April 2018, the government announced a change to LGPS regulations to allow exit credits to be paid to employers for the first time.

Exit credits arise when an employer is leaving the LGPS, and an actuarial assessment shows their pension liabilities have been overfunded and there is a funding surplus at the date of exit. Prior to this change, no exit credits were payable, but employers were responsible for meeting any funding shortfall on exit.

In the months after exit credits were introduced, concerns were raised about unforeseen impacts, specifically where employers had outsourced services or functions and had included specific pensions risk provisions in service agreements. It became clear that service providers were becoming entitled to exit credits where this was not the intention of the employer when the services were tendered, and service agreements made.

In May 2019, the Government launched a further consultation on amending the exit credit provisions, to enable an LGPS administering authority to consider a range of factors in determining whether an exit credit is payable, including the level of pension risk that an employer or service provider has borne.

The final outcome of the consultation was announced in February 2020, and has been implemented via the Local Government Pension Scheme (Amendment) Regulations 2020 (the 'Amending Regulations'), which came into effect on 20 March 2020. 

Consultation

Following the new regulations coming into force, our draft exit credit policy sets out the factors which we will consider in determining whether an exit credit is payable.

The final policy will apply for all employers exiting the Fund. It is most likely to impact existing and future short-term employers, such as those undertaking an outsourced arrangement, and the letting authority or organisation.

The consultation is open until 13 February 2021.

Draft policy

The draft policy was endorsed by the Pensions Committee on 18 December 2020.

The final version of the draft exit credits policy is subject to the outcome of a period of consultation with employers and other Fund stakeholders.

Please take time to:

  • look through the draft policy
  • consider how it may impact on your organisation as a participating employer in the Fund
  • submit any views and comments you may have via the consultation

Responses and queries

If you wish to submit a response or have any queries please email us with 'Exit Credit Policy' as the subject title of your email:


 

Fund’s pension discretion - public sector exit payment cap

Background to the public sector exit payment cap

The Public Sector Regulations 2020 came into force with effect from 4 November 2020. These placed a £95,000 cap on the total of exit payments made to an employee, when they are made redundant or their employment is terminated for reasons of business efficiency. The Ministry of Housing, Communities and Local Government (MHCLG) has opened a consultation seeking views on proposals for further reforming exit payment terms, by employers. The consultation also proposes changes to the Local Government Pension Scheme (LGPS) Regulations, in order to accommodate the £95,000 exit payment cap. This consultation closes on 18 December 2020, with the amending regulations coming into force early in 2021.

As the amendments to the LGPS Regulations were not in place when the £95,000 cap came into force, the Staffordshire Pension Fund sets out our policy below for the payments of benefits related to redundancy and business efficiency exits, that occur from 4 November 2020, until the LGPS regulations are changed to accommodate the exit payment cap.

Staffordshire Pension Fund - administering authority policy

Please note: this policy applies only to LGPS members who are aged 55 or over.

If the total of the exit payment elements are less than or equal to £95,000, LGPS benefits are payable immediately, without reduction for early payment, in line with the current regulations.

If the total exit payment is over £95,000, there is a conflict between the exit payment cap regulations and the current LGPS regulations and therefore, the Fund's discretionary policy is to offer the LGPS member the opportunity to receive one of the following:

  • a deferred benefit under LGPS regulation 6
  • a fully actuarial reduced pension under LGPS regulation 30(5)

Who does the exit payment cap apply to?

It applies to all public sector employees and employers including councils (metropolitan, county, district, borough) police and fire authorities and academies.

What is covered?

The exit payment cap is set at a total of £95,000 with no provision for this amount to be index-linked. Exit payments include redundancy payments (including statutory redundancy payments), severance payments, pension strain costs - which arise when an LGPS pension is paid unreduced before a member's normal pension age - and other payments made as a consequence of termination of employment.

The cap applies to all exit payments that arise within a 28-day period and the regulations cover the process to follow if an individual has multiple exits from public sector employment within 28 days.

The cap will only apply to those individuals where the combined total value of their exit payments (including pension strain costs) is greater than the £95,000 limit. Where it does apply then the value of the exit payments will have to be reduced to the point where the total value of all exit payments is no greater than £95,000.

Printable version

If you wish to print out this information, please select the document below:

Further information

If you need any further information about the areas covered by these notes, please contact us.


 

LGA exit payment webinar - 6 November 2020

A link to the latest exit payment webinar and the supporting slides is now available.

During the webinar the LGA mentioned some other useful resources:


 

Exit cap information for employers from the LGA

The LGA have published an information note for employers on the exit cap (external link to a PDF document). The document is available on the employer guides and documents page of the LGPS regulations and guidance website.

It supplements the public sector exit payments information on the scheme advisory board’s website.


 

The £95,000 exit payment cap regulations now in force from 4 November 2020

Please note: the exit cap applies to all public sector employees and employers including councils (metropolitan, county, district, borough) police and fire authorities and academies.

The Restriction of the Public Sector Regulations 2020 came into force today 4 November 2020. You will also be aware that the Ministry of Housing, Communities and Local Government (MHCLG) has opened a consultation seeking views on proposals for further reforming exit payment terms. The consultation proposes changes to the LGPS regulations in order to accommodate the £95k exit payment cap. The exit payment cap applies where there is employer funded compensation for early loss of office.

As previously advised the amendments to the LGPS would not be place when the £95k cap came into force and both HM Treasury and MHCLG recognised the predicament this puts local government employers and LGPS administering authorities in.

We would therefore refer Employers to the letter of 28 October from MHCLG Minister, Luke Hall, sent to LGPS administering authorities and local authority chief executives, in which the government set out its view that the Exit Pay Regulations effectively curtail the use of LGPS Reg 30(7) to pay an immediate unreduced pension when the cap is breached. According to this view, a ‘capped’ member should only receive an immediate pension under LGPS Reg 30(5) (with full actuarial reductions applied), or a deferred pension, together with a ‘cash alternative’ payable by the employer under cap Reg 8 of the Exit Cap Regulations.

Employers and LGPS administering authorities will need to take their own legal advice on what to do in the period between the Exit Cap Regulations coming into force on 4 November and the LGPS Regulations being amended early next year to expressly remove the entitlement to an unreduced pension under Reg 30(7) which would result in a breach of the cap. However, subject to any such advice, the Scheme Advisory Board Opinion which is based on the legal advice it has obtained, is:

“the course of action presenting the least risk to both LGPS administering authorities and scheme employers is for the:

  • LGPS administering authority to offer the member the opportunity to take a deferred benefit under LGPS regulation 6 or a fully actuarially reduced pension under LGPS regulation 30(5)
  • Scheme employer to delay the payment of a cash alternative under regulation 8 of the Exit Cap Regulations”

Urgent action to be taken by public sector employers

Employers should carefully consider and assess the impact the changes confirmed by the government will have on their organisation and employees, specifically if an employee's retirement date is after the implementation of the exit cap but before the changes to the LGPS regulations are made to accommodate the £95k exit payment cap.

Further information

To further assist employers, see the Scheme Advisory Board's website for all the latest information on public sector exit payment cap


 

The £95,000 exit payment cap - effective from 4 November 2020

The legislation implementing the £95k cap (external link to a PDF document) on exit payments has now been signed and comes into force on 4 November 2020.

Please note: the exit cap applies to all public sector employees and employers including councils (metropolitan, county, district, borough) police and fire authorities and academies.

We understand the guidance and directions to accompany the regulations will be issued shortly. This will set out the discretionary waiver process and the position of exits agreed before 4 November 2020, where the date of leaving is after.

You will be aware that Ministry of Housing, Communities and Local Government (MHCLG) have opened a consultation seeking views on proposals for further reforming exit payment terms. The consultation proposes changes to the LGPS regulations in order to accommodate the £95k exit payment cap. It also proposes a limit on cash severance payments and for the strain cost to be reduced by the value of any statutory redundancy payment made.

Clearly, the amendments to the LGPS will not be in place when the £95k cap comes into force and both HM Treasury and MHCLG are aware of the predicament this puts local government employers and LGPS administering authorities in. Again, we understand that MHCLG will be issuing a statement on this shortly. In the meantime, the scheme advisory board (SAB) is seeking legal advice concerning the risk of challenge to LGPS authorities during this period.

Please note: in the period between 4 November 2020 and the date the LGPS regulations are amended:

  • only exits where the cost exceeds the £95k cap will be impacted
  • the statutory guidance on standard strain cost will not be effective i.e. Staffordshire Pension Fund will continue to calculate strain cost on a local basis
  • the proposals in the MHCLG consultation around limiting cash severance payments and the strain cost being reduced by the value of any statutory redundancy pay will not apply

MHCLG consultation on further reform of exit payments

In addition to the £95k exit payment cap MHCLG has launched a consultation on changes to the Local Government Pension Scheme (LGPS) and Discretionary Compensation Regulations (external link to a PDF document). The consultation covers the required changes to compensation and pension regulations to implement both the £95K exit payment cap and the public sector exit payments further reform proposals (external link to a PDF document) issued by HMT in 2016.

The latter proposals were left to individual departments to implement rather than being via central HMT Directions. At this stage there have been no proposals to implement an exit payment recovery process that was also consulted on in 2015. The MHCLG consultation closes on 9 November 2020. Currently no other part of the public sector has any 'live' proposals to enact the further reform proposals.

Further information

To further assist employers, see the scheme advisory board's website for all the latest information on public sector exit payment cap


 

Further update of the £95,000 exit payment cap

Please note: the exit cap applies to all public sector employees and employers including employers and employees of councils (whether metropolitan, county, district, borough or parish) police and fire authorities and academies.

Further to our recent communications, we are keeping you informed of the government's consultation on changes to the Local Government Pension Scheme (LGPS) and Discretionary Compensation Regulations (external link to a PDF document).

The Staffordshire Pension Fund's actuary has produced a briefing note providing examples of how the exit cap restriction will apply to the Local Government Pension Scheme.

The worked examples demonstrate the 'before and after' impact of the reforms on employees, and the new options that will be available post reform. The examples are illustrative only and are based on the actuary's current understanding of the government's intentions as set out in the consultation document.

Please note: the scenarios shown should not be relied upon for retirement planning and may not reflect the reality of legislation and/or the government actuary's department (GAD) guidance when they are finalised. 


 

Restriction of Public Sector Exit Payment Regulations 2020

Please note: the exit cap applies to all public sector employees and employers including employers and employees of councils (whether metropolitan, county, district, borough or parish) police and fire authorities and academies.

Further to our recent communications, we are keeping you informed of the government's consultation on changes to the Local Government Pension Scheme (LGPS) and Discretionary Compensation Regulations (external link to a PDF document).

The consultation covers the required changes to compensation and pension regulations to implement both the £95k exit payment cap and the public sector exit payments further reform proposals (external link to a PDF document) issued by HM Treasury (HMT) in 2016.

The Restriction of Public Sector Exit Payments Regulations 2020 required to implement the £95K cap were approved by Parliament on 30 September 2020. However, the regulations still have to be laid. This can happen at any point from now onwards, although we don’t know the exact date at present.

Once the regulations have been laid there will be a period of 21 days before scheme employers will be required to apply them. Once the regulations are in place (for employers in scope), in the case of any employee who terminates and where the total of statutory redundancy pay, additional severance pay and 'actuarial strain' (payable to the Pension Fund), exceed £95,000, then total compensation will need to be capped at £95,000.

Once the regulations are in place (for employers in scope), in the case of any employee who terminates and where the total of statutory redundancy pay, additional severance pay and 'actuarial strain' (payable to the Pension Fund), exceed £95,000, then total compensation will need to be capped at £95,000.

This will potentially impact any employees who may have already received quotations for termination on the grounds of redundancy and business efficiency, who leave after the exit cap regulations are enacted.

The Local Government Association (LGA) and Local Government Pension Funds are seeking urgent clarification from the government on the two matters below:

  • the position for exits agreed before the legislation takes effect but where the date of leaving is after
  • the position if the HM Treasury regulations come into effect before Ministry of Housing, Communities and Local Government (MHCLG) can introduce the necessary changes to the LGPS regulations to accommodate it

The LGA and Local Government Pension Funds will continue to press the government for answers and will update all administering authorities as soon as we have any news.

Urgent action to be taken by public sector employers

Employers should carefully consider and assess the impact the changes confirmed by the government will have on their organisation and employees, specifically if an employee's retirement date is after the implementation of the exit cap.

Important: consultation on changes to the Local Government Pension Scheme (LGPS) and Discretionary Compensation Regulations

There will be a separate consultation on changes to the LGPS and Discretionary Compensation Regulations. (This is still pending an implementation date).

These proposals will limit the payments made to, or in relation to, employees of 'reform employers' in addition to statutory entitlement as follows:

  • the actual pay used in severance calculations will be limited to £80,000
  • the maximum severance (including statutory redundancy pay) will be limited to 3 weeks' pay per year of service or 15 months' pay, whichever is the lower
  • no severance will be payable if the member receives an immediate pension with a payment by the employer to cover the cost of early release of pension - the strain cost - except in the case of the severance amount exceeding the strain cost in which case the excess would be payable

Further information

To further assist employers, see the Scheme Advisory Board's website for all the latest information on public sector exit payment cap


 

Important - government consultation on restricting public sector exit payments in local government

When will the exit cap come into force?

The consultation does not indicate a timescale for the regulations to take effect. However, we understand from previous briefings that the intention is for these to be implemented by the start of 2021

Whilst they will not be backdated, they will potentially disrupt workforce planning discussions currently underway that might not come into effect until after the exit payment cap restrictions are introduced.

This is the reason for quickly ensuring that colleagues at councils, academy schools and other public sector employers are aware of these proposals.

Who does this apply to?

The cap will apply to all public sector workers including, employers and employees of councils (whether metropolitan, county, district, borough or parish) police and fire authorities and academies.

Changes coming into force

The key elements can be summarised as:

  • a maximum tariff for calculating exit payments of three weeks' pay per year of service. Employers could apply tariff rates below these limits
  • a ceiling of 15 months (66 weeks) on the maximum number of months' or weeks salary that can be paid as a redundancy compensation payment. Employers will have discretion to apply lower limits, as they do at present under 2006 regulations
  • a maximum salary of £80,000 on which a redundancy compensation payment can be based, to be reviewed on an annual basis using an appropriate mechanism, for example consumer prices index (CPI)
  • a £95k cap on the total of all forms of compensation, including redundancy payments, pension top-ups (pension strain), compromise agreements and special severance payments

Urgent action to be taken by public sector employers

Employers should carefully consider and assess the impact the changes announced by the government will have on their organisation and employees, specifically if an employee's retirement or leaving date is likely to be after the implementation of the exit payments cap.

Does your current redundancy or severance pay terms and conditions need amending in line with the first three bullet points detailed above in the section on changes coming into force?

Ensure that potential early retirement packages being prepared are suitably caveated. In particular, there are risks if retirement quotes are being issued this calendar year where the retirement may not occur until after these new regulations take place; the quotes may be invalidated with the benefits requiring revision.

Consider completing your own response to the consultation.

The purpose of the consultation

The closing date for responses is 9 November 2020.

This consultation is not seeking views or representations on the government's position regarding exit pay reform. The framework for reform has been produced following extensive consultation led by HM Treasury. Instead, this consultation is seeking information on:

  • the effect(s) that the proposals for reform outlined below will have on the regulations which currently govern exit payments (including both redundancy compensation pay and early access to pensions) in local government
  • the impact that the proposals for reform will have on the local government workforce. Consultation responses will inform a full impact assessment, including equalities considerations which will be issued alongside the regulations when these are laid before Parliament 

What is covered?

The exit payment cap is set at a total of £95,000 with no provision for this amount to be index-linked. Exit payments include redundancy payments (including statutory redundancy payments), severance payments, pension strain costs - which arise when an LGPS pension is paid unreduced before a member's normal pension age - and other payments made as a consequence of termination of employment.

The cap applies to all exit payments that arise within a 28 day period and the regulations cover the process to follow if an individual has multiple exits from public sector employment within 28 days.

The cap will only apply to those individuals where the combined total value of their exit payments (including pension strain costs) is greater than the £95,000 limit. Where it does apply then the value of the exit payments will have to be reduced to the point where the total value of all exit payments is no greater than £95,000.

What isn’t covered?

Payments related to death in service or ill health retirement, pay in lieu of holidays, payments made in compliance with an order made by a court or tribunal and payments in lieu of notice that do not exceed a quarter of a person’s salary are not exit payments for the purposes of these regulations.

Although statutory redundancy is included as an exit payment it cannot be reduced. If the cap is exceeded, other elements that make up the exit payment must be reduced to achieve an exit payment of £95,000 or less. 

Relaxing the cap

There are circumstances, as set out in draft HM Treasury (HMT) directions, when the cap must be or may be relaxed by a minister or the authority. However, most are subject to consent by HMT, even if passed by full council. Employers are required to record and publish information about any decisions made to relax the cap.

Applying the cap in the Local Government Pension Scheme

The current proposals confirm that position, and now provide some detail on the practicalities. In brief:

  • the amount of strain cost will be determined using standardised actuarial factors, rather than fund specific factors already in place
  • if the overall package is below £95,000 then benefits can, as now, be paid in full
  • if the overall package exceeds the cap then the strain cost needs to be addressed, with the member having various options, including:
    • LGPS benefits still being paid immediately but on a reduced basis, with no additional compensation
    • LGPS benefits being paid in full, with the member choosing to take less lump sum compensation
    • 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
  • in certain circumstances the member may be able to make up any reduction in strain costs from their own resources

Further information

To further assist employers, see the advisory board website for all the latest information on public sector exit payment cap.

Printable version

If you wish to print out this information, please select the document below:


 

Covid-19 update for Employers - 6 April 2020

Please see the Covid-19 information advice page.