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Education briefing - Public Sector exit cap disapplied

  • United Kingdom
  • Education - Briefings

16-02-2021

On Friday afternoon the Government announced a surprise U-turn on the controversial £95,000 cap on public sector exit payments (the “Cap”), effectively disapplying the Cap with immediate effect. It also issued brief guidance for employers and individuals on this development and Mandatory HM Treasury Directions (the Directions).

The Cap was introduced on 4 November 2020 under The Restriction of Public Sector Exit Payments Regulations 2020 (“the Regulations”) to restrict public sector exit payments (including Local Government Pension Scheme (“LGPS”) strain costs) to a total of £95,000 per employee. The Schedule to the Regulations lists all public sector bodies to which the Cap applied. This includes academy schools, alternative provision academies and 16-19 academies.

The only reason cited in this surprise announcement is simply that the Cap “may have had unintended consequences”. The decision comes only weeks before the Regulations were about to be subject to a judicial review challenge.

Have the Regulations been revoked?

No. Technically the Regulations remain in force, but certain parts of the Regulations have been disapplied by the Directions. These effectively disapply the Cap and regulations 9-12, which deal with the duty of employees to inform and the waiver provisions.

HM Treasury will need to go through a formal process to formally revoke the Regulations. Given the content of the Guidance, it appears that the policy intention is that the revocation will have retrospective effect back to 4 November 2020. However, the Guidance is not clear on this point.

Despite the Directions, HM Treasury has confirmed that it intends to bring forward new proposals “at pace” to tackle unjustified exit payments.

Guidance for individuals

The Guidance is brief and directs affected individuals whose employment terminated between 4 November 2020 and 12 February 2021 to contact their former employers directly to request the amount they would have received had the Cap not been in place.

Guidance for employers

Whilst the guidance does not mandate that employers must pay the additional sums that would have been paid to former employees who had an exit date between 4 November 2020 and 12 February 2021 but for the Cap, HM Treasury’s expectation is that they will do so.

The guidance also states, for the avoidance of doubt, that it is still vital that exit payments deliver value for the taxpayer and employers should always consider whether exit payments are fair and proportionate.

Impact for LGPS administering authorities

The Directions throw into question the guidance issued by the Ministry for Housing Communities and Local Government on 28 October 2020 advising that Regulation 30(7) of the Local Government Pension Scheme Regulations 2013 was subject to the Cap and so the provisions of Regulation 8 of the 2020 Regulations and Regulation 30(5) of the LGPS 2013 Regulations should be engaged where the Cap was exceeded.

Regulation 30(7) provides for an immediate unreduced pension where employees aged 55 and above are made redundant or their employment is terminated on grounds of business efficiency. Any strain payment triggered by Regulation 30(7) counted as an exit payment and in many cases caused the Cap to be exceeded.

Given that the Directions disapply the Cap (at least from 12 February 2021) and that the Regulations will be revoked, the logical conclusion must be that the guidance contained in the MHCLG letter now falls away. We would expect MHCLG to confirm this point as a matter of urgency.

If any employers paid alternative cash amounts under Regulation 8 of the Regulations then these may now need to be revisited. Logically, it should not be possible for employees to retain alternative cash amounts whilst also claiming their full original entitlement, but practical difficulties in unwinding such payments may arise where they have already been spent in full or in part.

What is the status of the judicial review proceedings?

It is too early to say, but on the basis that the Regulations are being revoked, it seems logical that the need for the judicial review challenges will now also fall away and therefore that the claims will be withdrawn.