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Public Sector Exit Payments – top-ups due as regulations revoked

  • United Kingdom
  • Pensions - Public sector
  • Governments and Infrastructure

01-03-2021

Further to our speedbrief on the disapplication of the £95,000 cap on public sector exit payments (the “Cap”), HM Treasury has now laid regulations to formally revoke The Restriction of Public Sector Exit Payments Regulations 2020 (the “Exit Payments Regulations”) with effect from 19 March 2021.

The Restriction of Public Sector Exit Payments (Revocation) Regulations 2021 (the “Revocation Regulations”) also require relevant authorities to make additional exit payments up to the greater amount which would otherwise have applied if the Cap had not been in force. This is a mandatory requirement and not an employer discretion.

As well as exit payments made direct to employees, this new provision also covers payments made in respect of an employee to another person and/or to a public sector pension scheme, such as the Local Government Pension Scheme (“LGPS”). This would therefore include a strain payment made to a LGPS pension fund in respect of a redundancy-triggered unreduced early retirement pension.

Interest

In addition to the obligation to make a top-up exit payment, the relevant authority will also be obliged to pay interest on that top-up payment at 8% in accordance with the Judgment Debts (Rate of Interest) Order 1993.

The Order normally requires 8% simple interest to be paid from the date of a court judgement. Whilst it is not entirely clear, we expect the intention is that the interest should run on any additional exit payment from the date the original (capped) payment was paid. The position on interest on any LGPS strain costs is less clear, although a practical approach may be to pay interest from the date when the strain cost would have been invoiced by the LGPS fund.

The 8% interest requirement does not apply to the late payment of any LGPS benefits which were previously withheld in compliance with the Cap, as a pension is not an ‘exit payment’ paid by the employer. Instead, interest on any late LGPS benefits will only be payable where the interest provisions contained within the Local Government Pension Scheme Regulations 2013 (the “LGPS Regulations”) so require.

Summary

The Revocation Regulations formally tidy up the revocation of the Cap and, whilst not technically retrospective in effect, require relevant authorities to top up exit payments made previously as though the Cap never applied, plus interest at 8%. Whereas the guidance issued with the Directions on 12 February 2021 suggested this would be at the employer’s choice, the top-up payments are now mandatory. This may cause some employers financial issues in finding the funds to make these additional exit payments. This may be a particular problem in relation to LGPS strain costs, which can be significantly higher than the cash exit payments paid to an employee.

Whilst the 8% interest charge applies to the strain cost payable to an LGPS pension fund, it does not apply to the actual LGPS benefits now payable by the pension fund to the member. Administering authorities will instead need to consider the interest on late payment provisions contained in the LGPS Regulations.

The Revocation Regulations also do not address the recovery of any alternative cash payments that a relevant authority may have paid to an employee under Regulation 8 of the Exit Payments Regulations on the basis that the Cap applied at the time and no unreduced LGPS pension was payable. This will be a matter for the relevant authority to pursue under general law.