Employers

Exit cap information for LGPS employers

On 4 November 2020, the Government introduced a cap on the payments made to public service employees when they leave employment. This cap covers all of the major public services, including local government, teachers, civil service and NHS (employers will need to determine whether the cap will apply to them.

See full list of affected employers.

The cap covers a broad range of circumstances including both voluntary and compulsory termination of employment and it will affect most of the possible components of severance packages.

The cap includes:

  • Redundancy payments
  • Any other compensation or severance payments
  • Pay in lieu of notice (where this exceeds one quarter of the individual's salary); and
  • Employer strain costs to provide early unreduced access to benefits

View Guidance and directions to accompany the Exit Payment Regulations.

The introduction of the exit cap means that the regulations which currently govern exit payments (including both redundancy compensation pay and early access to pensions) in local government will change. The Government has consulted on future changes to the Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2006 and Local Government Pension Scheme Regulations 2013.

Exit process for those retiring on redundancy or efficiency grounds

It is particularly important that you maintain close contact with the Pensions Shared Service throughout the process set out below.

Step 1 

Check if the exit cap regulations apply to you as an employer. You do this by looking at the Schedule at the end of the Restriction of Public Sector Exit Payments Regulations 2020.

To find out if the exit cap regulations will apply to you, check if your employer appears on the list of Public Sector Authorities

Step 2 

If the exit cap regulations apply, check the total value of the exit payments you would normally make to, or in respect of, the employee that is exiting your employment.

View Exit payments  for a list of exit payments that you need to consider. The LGPS pension is normally payable immediately without reduction.

You must include the pension strain cost when checking the total value of the exit payments.

Special rules apply if the employee is exiting from more than one public sector employment in a 28-day period. Under the exit cap regulations, the employee must tell you about any other public sector exits. You may wish to ask the employee about any other exits from public sector employment to ensure that you do not inadvertently breach the cap.

If the total value of the exit payments is less than or equal to £95,000 go to step 3. If the total value of the exit payments is more than £95,000 go to step 4.

Step 3  

If the total of the exit payments is less than or equal to £95,000, process the exit as normal. The pension is payable immediately without reduction for early payment in line with the LGPS regulations. Your normal process for meeting the strain cost continues to apply.

You must inform your LGPS administering authority that the employee is not capped. You need take no further action under the exit cap regulations in respect of this exit.

Step 4

If the total value of the exit payments is more than £95,000, consider whether either a mandatory or discretionary waiver is applicable.

For information about when a waiver is appropriate and a pro forma, see the documents produced by HM Treasury (HMT):

If you decide a waiver is applicable, follow the process set out in the HMT documents above. More guidance on the process is expected from MHCLG in the coming weeks.

You must inform the Pensions Shared Service that the employee is capped but a waiver request has been made.

If the waiver request is accepted, the pension is payable immediately without reduction for early payment. Your normal process for meeting the strain cost continues to apply.

You must inform the Pensions Shared Service that the cap has been waived in respect of this exit.

If you decide a waiver is not applicable or the waiver request is denied move to step 5.

Step 5

Consider the elements that make up the total exit payment. Decide if any exit payments other than pension strain cost, statutory redundancy payment (SRP) and any other payments you are obliged to make can be reduced to bring the total to no more than £95,000.

If the new total of the exit payments being made to or in respect of the individual is less than or equal to £95,000, go to step 6. If the total is over £95,000 when the pension strain, statutory redundancy pay and any other payments you are obliged to make are left, go to step 7.

Step 6

The uncapped employee will be entitled to immediate payment of their LGPS pension without reduction for early payment in line with the LGPS regulations. Your normal process for meeting the strain cost continues to apply.

You must inform the Pensions Shared Service that the employee is not capped. You need take no further action under the exit cap regulations in respect of this exit.

Step 7

If the total exit payment is over £95,000 when just the pension strain, statutory redundancy payment and any other payments you are obliged to make remain, there is a conflict between the exit cap regulations and the LGPS regulations.

The LGPS regulations still require the member to take payment of an unreduced pension, but the exit cap regulations prevent the employer from paying the full strain cost.

You must inform the Pensions Shared Service that the employee is capped.

As an employer you need to decide whether to make a cash alternative payment under regulation 8 of the exit cap regulations.

To assist you with this decision, the Scheme Advisory Board (SAB) has obtained legal advice. View commentary on that legal advice on the Public Sector Exit Payments  (SAB website).

You should also have regard to the letter from MHCLG to LGPS administering authorities dated 28 October 2020.

Although you must make your own decision regarding a cash alternative, the SAB recommends you delay any decisions until the employee’s pension is confirmed based on the following considerations:

  • If your LGPS administering authority decides to pay an unreduced pension they will ask for a strain cost payment, payable up to the cap. You will not be able to make this payment if you have paid a cash alternative. You could end up paying twice, once as a cash alternative and once as increased scheme costs
  • If the employee is denied an unreduced pension, they are likely to lodge a claim. If they win, they could be awarded payment of an unreduced pension. The Pension Fund administrators will then ask you for a strain cost payment, payable up to the cap. You will not be able to make this payment if you have paid a cash alternative. In this case you could end up paying twice, once as a cash alternative and once as increased scheme costs
  • A cash alternative payment attracts both income tax and employer’s National Insurance where the total termination payment is above £30,000. An employee who receives a reduced pension may prefer you to pay the cash alternative to the LGPS administering authority to purchase extra pension

If you decide to make a cash alternative payment regardless of the potential outcomes mentioned above, you should inform the Pensions Shared Service.

Please note, it is for your LGPS administering authority to decide if a full or reduced pension is payable in these circumstances. Your LGPS administering authority will inform you once the employee’s pension is confirmed.

View this flowchart that summarises the process described above.

Disclaimer

This document has been prepared by the LGA. It should not be treated as a complete and authoritative statement of the law. Employers may wish, or will need, to take their own legal advice. No responsibility whatsoever will be assumed by the LGA or your administering authority for any direct or consequential loss, financial or otherwise, damage or inconvenience, or any other obligation or liability incurred by readers relying on information contained in this document.