The Problem

As local authorities will be very much aware, the £95,000 cap on exit pay in the public sector came into force on November 4 2020. The timing of the implementation of the cap is particularly difficult, principally in relation to the impact of the cap on making pension strain payments under the Local Government Pension Scheme (LGPS) rules.

An LGPS member who is made redundant over the age of 55 is entitled to an unreduced pension. The cost of that benefit is not covered by normal pension contributions. Instead the pension fund charges the employer a sum to cover the cost. This is the pension strain payment and it is this payment that is caught up in the £95,000 cap. 

The Ministry for Housing, Communities and Local Government (MHCLG) proposes that the LGPS Regulations should be amended so that it is clear that pension strain costs can be capped to comply with the limit.   However, this consultation will run until 18 December 2020.  This will mean that the changes to the LGPS to accommodate the application of the cap to pension strain, will realistically not be for a few months now.

So what happens to pensions in this limbo period between the cap coming into force and the LGPS rules  being changed?  An employee may be entitled to an unreduced pension on redundancy but their employing council cannot legally fund a pension strain cost which breached the exit pay cap.

It had been hoped that some guidance from MHCLG would be forthcoming to assist local authorities on this and other outstanding issues with the application of the cap.

However, on 16 December 2020 MHCLG published its Guidance for local authorities in England (only) for the interim period until MHCLG regulations come into force, and it does not resolve the problem or address these issues.

MHCLG states that the document provides guidance on how it will deal with applications for the relaxation of the restrictions from public sector employers in relation to employees who are eligible for membership of the LGPS, including LGPS employers who are also covered by the regulations. The document should be read in conjunction with the guidance from Treasury, which has already been updated since it was first issued in October (but with no changes of substance for local authorities).

MHCLG has said that the guidance, as well as directions and guidance from the Treasury, could be amended when it formally responds to the LGPS consultation.

What does the Guidance say?

The Guidance maintains the Government’s position that the Exit Pay Cap Regulations take precedence over previous contractual agreements, regulations and other exit schemes which would have made provision for larger payments than those permitted under the Regulations.  However, legally that is not a view which is shared and is the subject of challenge in the existing judicial review proceedings in respect of the cap. 

It also confirms that local government employers are no longer permitted to make payments over £95,000 to the pension scheme to fund early exit terms unless payment is in compliance with the Regulations and the waiver process. The LGA has stated in response that, notwithstanding the Guidance, it recommends authorities seek legal advice relating to their specific circumstances regarding any exits occurring on or after 4 November 2020 that may exceed the cap.

The Guidance is predominantly directed at explaining how the waiver or relaxation process will work within local government within England, given the business cases and approvals required.   The circumstances in which mandatory and discretionary waivers are available, and the approvals needed, are the same as in the existing HM Treasury Direction.  The Guidance states that MHCLG ministers have given officials a delegation to approve mandatory cases. For discretionary waivers, it states that councils should not make formal offers to employees nor confirm their last day of service prior to decisions on the relaxation of the restrictions being taken by ministers.

All exit payments to be made by the employing council or relevant pension scheme administrative authority requiring a relaxation of the restriction must be submitted as a business case to the MHCLG dedicated email inbox for scrutiny. Sign off by the section 151 officer and approval from full council should be evidenced with the application. Section 4 of the Guidance sets out the information which must be contained in any business case supporting a waiver request for both individual exits and bulk relaxation applications.  When a council wants to submit a business case to relax the cap, the LGPS administering authority should give them information about the strain cost which must then be included in the business case.

There is also scope for “in principle” decisions by MHCLG on relaxations where there is a redundancy exercise which would need a bulk relaxation.  The intention is that this would allow for a preliminary view by the Department of whether, in principle, a discretionary relaxation would be possible to aid the authority to make requests for volunteers. But the authority will need to come back to the Secretary of State for Local Government and Treasury ministers for a final decision.

A decision may take up to 28 working days or more if further clarification is requested by ministers and ministers’ decisions will be final, with no further point of Departmental appeal.

So where does that leave us?

Whilst the information on the waiver process is welcome and necessary, the Guidance does not address the issue with the conflict between the application of the cap and the strain costs needed to fund an unreduced pension entitlement for some employees on redundancy where that would mean breaching the cap.  

Local authority scheme employers and administering authorities are still left in a difficult legal position until the matter is resolved by the changes proposed in the MHCLG consultation to amend the LGPS rules are implemented or the impact of the judicial review proceedings, if successful.  

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