Important - government confirms early retirement costs (pension strain) will be included in the public sector exit payment cap
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 date is likely to be after the implementation of the exit cap.
As we understand it currently, there will be no transitional period and employees will be subject to Local Government Pension Scheme regulations that apply on their date of leaving.
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.
When will the cap come into force?
Regulations provide for the cap to come into force 21 days after they are made. However, the regulations are subject to the affirmative procedure so will need to be approved by both houses of parliament before they can apply. We understand it is the intention that the cap will be in force for the end of the 2020 calendar year.
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.
Applying the cap in the LGPS
The major impact of the regulations will be on LGPS members aged 55 or over who currently qualify for an unreduced pension because of redundancy or efficiency retirement as well as a severance payment under the Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2006.
We understand that changes to those regulations will prevent the payment of severance in addition to a pension strain cost. Not only will a severance payment no longer be payable but if a pension strain payment cannot be made in full because of the cap, then the member would be faced with having to take a reduced pension.
We understand that MHCLG is looking at options to introduce choice for members to take a deferred benefit rather than a reduced pension together with guidance on the calculation of standardised strain costs and the option to purchase the shortfall. Any changes to LGPS regulations would be subject to a further consultation.
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.
Employee and employer responsibilities
A person who receives an exit payment must inform any other public body covered by the regulations that employs them about that payment. An employer must ensure that any exit payment does not exceed the cap (unless permitted by the relaxation directions) and, where a non-compliant payment is made, recover any overpayment subject to a value for money assessment.
What happens next? – subject to the Government approval
We understand that the Ministry of Housing Communities and Local Government (MHCLG) is looking at options to introduce choice for members to take a deferred benefit rather than a partially reduced pension. Subject to the government's approval we understand that other possible options could be that employees:
- receive payment of a reduced pension and lump sum, but keep the redundancy or other exit payments (limited to the £95,000 cap)
- give up some or all of their redundancy payment or other exit payments to receive an unreduced pension, or limit the amount of the reduction to the retirement benefits
- choose a mixture of the above which will mean giving up some of their redundancy pay to remove some (but not all) of the reduction on their pension and lump sum
To further assist employers, see the advisory board website for all the latest information on public sector exit payment cap.
If you wish to print out this information, please select the document below:
McCloud judgement - government consultation published - 22 July 2020
On Thursday 16 July MHCLG published a consultation on proposed remedies for the LGPS to remove age discrimination.
The consultation will last for 12 weeks from 16 July 2020 to 8 October 2020.
Over the last 18 months we have kept employers informed about the McCloud case and the implications for the LGPS. For ease we have summarised below what the McCloud Judgement means for the LGPS.
What is the McCloud case?
When the LGPS changed from a final salary to a career average pension scheme in 2014, protections for older scheme members were introduced. Similar protections were provided in other public sector pension schemes. However, the Court of Appeal ruled that younger members of the judges' and firefighters' pension schemes have been discriminated against because the protections do not apply to them. Following this judgement, the government has confirmed that there will be changes to all main public sector schemes, including the LGPS, to remove this age discrimination. This ruling is often called the 'McCloud judgment'.
What happens next?
Decisions concerning who is in scope for protection, the extent of final salary service protection and the effect on ancillary benefits such as transfer payments and survivor benefits will be made centrally. The scheme advisory board (SAB) will work closely with the Ministry of Housing, Communities and Local Government (MHCLG) and the government's actuary department (GAD) to ensure that the remedy to remove age discrimination from the LGPS is robust and comprehensive.
When would any changes to schemes be effective from?
It is anticipated that any remedy would be backdated to the commencement of the revised LGPS which was introduced on 1 April 2014. The government has confirmed that members who qualify for the protection do not need to make a claim for the changes. If members qualify for the protection it will apply automatically.
As previously advised, we require all employers to retain hour changes and salary details for all employees, past and present who were members of the LGPS on the 1 April 2014. This must include the contractual hours per week, the effective date and the pensionable earnings during that period. Employers will also be required to record breaks in service due to authorised unpaid absence.
At this stage we do not require employers to submit this additional information to the Fund. However, it is vitally important employers maintain the employee contractual hours history which will be required by the Fund in the future.
The Staffordshire Pension Fund is assessing the impact the consultation will have on the LGPS. We will issue a response by 8 October 2020. Employers may also want to assess the impact the changes will have on their own organisation and consider submitting their own written response to the consultation.
Further information and questions and answers
To further assist employers, see the advisory board website for all the latest information on the McCloud judgement including questions and answers outlining the possible outcomes.
Promotion of My Pension Portal - 2 June 2020
During June and July, we will be writing to the active members of the Staffordshire Pension Fund, providing them with instructions on how they can register for My Pension Portal.
The annual benefit statements will only be available this year on the portal, unless members make a request to receive a paper copy.
To coincide with these mailshots to members, we have created some promotional material which you might like to place on notice boards, use on intranet sites or simply cascade the e-posters through your internal email system.
We would like to ensure that as many members as possible register prior to the date that the statements are published.
Your assistance in this matter will be greatly appreciated.
We have created 3 slightly different posters hi-lighting what members can use the portal for. Please feel free to use all or just your preferred one.
Covid-19 update for Employers - 6 April 2020
Please see the Covid-19 information advice page.