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Public Sector Exit Payments Regulations to be revoked

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

15-02-2021

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.

The Cap was introduced on 4th 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 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Have the Regulations been revoked?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 Directions issued by HM Treasury. These effectively disapply the Cap and regulations 9-12, which deal with the duty of employees to inform and the waiver provisions. HM Treasury has also issued guidance to accompany the Directions.

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 4th November 2020. However, the guidance is not clear on this point.

Whilst the Directions do not apply to exit payments made by a devolved Welsh authority, we understand that the Welsh government will issue a similar direction shortly.

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 4th November 2020 and 12th February 2021 to contact their former employers directly to request the amount they would have received had the cap not been in place. This supports the view that Treasury may revoke the Regulations with retrospective effect, although the intention could be to regard any ‘top up’ payments as additional exit payments made after the Directions.

Guidance for employers

Whilst the guidance does not mandate that employers must pay the additional sums that would have been paid but for the Cap, it does encourage them to do so. It is possible that some employers may not be able to afford to do this, having made decisions based on the fact the Cap would apply. The fact employers have a discretion to pay ‘top up’ payments perhaps suggests the revocation of the Regulations will not be retrospective.

HM Treasury notes 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 MHCLG consultation?

The Directions also call into question the status of the MHCLG consultation which closed in December 2020 on the application of the Cap to local government and the proposed amendments to the LGPS. In light of this latest news, it seems inconceivable that this consultation can proceed based on the current proposals until HM Treasury’s new proposals are made clear.

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.

Summary

The HM Treasury Directions and guidance came out of the blue and have taken most affected employers and employees by complete surprise. 

The timing of the announcement so close to the judicial review hearing, and the drastic nature of the U-turn on this policy, necessarily implies that the Government’s legal advisers had grave doubts as to the strength of the Government’s position going into the hearing.

Relevant authorities are now faced with finding the funds to pay the full exit packages that they have not budgeted to pay. LGPS administering authorities may also be forced to revisit all the cases where unreduced early retirement pensions were refused and/or potentially adjust reduced pensions that have been paid.

However, it seems the issue of public sector exit payments is not going to disappear quietly, given HM Treasury’s statement that it intends to bring forward new proposals at pace to tackle unjustified exit payments.