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The £95,000 exit payment cap regulations came into force from 4 November 2020

Who does the exit payment cap apply to?

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

When will the exit payment cap come into force?

The legislation implementing the £95,000 exit cap has now been signed off by the Government and came into force on 4 November 2020.

The amendments to the LGPS regulations were not in place when the £95,000 cap came into force and are not expected until early 2021. Therefore, in the period between 4 November 2020 and the date the LGPS regulations are amended, only exits where the cost exceeds the £95,000 cap will be impacted.

What is the value of the exit payment cap and what payments does the cap include?

The exit payment cap is set at a total of £95,000. Exit payments include redundancy payments (including statutory redundancy payments), severance payments, pension strain costs - which arise when a Local Government Pension Scheme (LGPS) benefit 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 is the pension strain cost and who pays the pension strain cost?

Under the rules of the LGPS, if you choose to receive your local government pension before your normal retirement date, then your pension would normally be reduced, to take into account the fact that you are receiving your pension earlier than your normal retirement date.

However, if you are over age 55 and your employer terminates your contract of employment on grounds of redundancy or efficiency, you are entitled to receive an immediate payment of your pension benefits relating to that employment. This will mean that your employer will need to pay an amount of money into the Staffordshire Pension Fund, so that you can receive your full pension, up to the date of leaving, without any reduction in your pension because it has been paid early. The amount of money your employer pays into the Pension Fund, so that you can receive an unreduced pension is called the pension strain cost.

To qualify for LGPS pension benefits, you must pay into the LGPS for at least two years, or transfer pension benefits from another scheme into the LGPS. If you leave the scheme with less than two years' membership, you may not qualify for LGPS pension benefits and will usually be able to choose to have a refund of your contribution.

How can I find out if my exit payments exceed the £95,000 cap?

If you are currently 55 or over and serving a notice period under redundancy, or you and your employer have entered into a redundancy consultation period, your employer should already have (or will be in the process of obtaining) the amount of the pension strain cost. When they have this, they will be able to establish if the pension strain cost when added to other termination payments you are entitled to receive, exceed the £95,000 cap.

If you are facing immediate redundancy from an employer who is covered by the exit payment cap regulations and your exit payment (including the pension strain) will be more than the cap your current options are:

  • take a deferred benefit payable from your normal retirement age
  • or immediate payment of your pension benefits with a full early retirement reduction applied

If you have any concerns about an ongoing redundancy case and your employer is likely to be affected by the cap, please speak to your employer.

What happens next? – government's consultation on further reform of exit payments

In addition to the £95,000 exit payment cap, MHCLG has launched a further consultation on changes to the LGPS and the Discretionary Compensation Regulations.

Further to the government introducing the Restriction of Public Sector Exit Payments regulations and subject to LGPS regulations being amended we understand that other possible options could be that:

  • 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 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 two options 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
  • receive a deferred pension benefit rather that a partially reduced pensions, but keep the redundancy or other exit payments (limited to the £95,000 cap)

Further information

If you do have any further questions about how the £95,000 exit payment cap may affect you, then please speak directly to your employer.

Last updated: 12 November 2020