The cap of £95,000 on public sector exit payments finally came into force on 4 November 2020 when the Restriction of Public Sector Exit Payments Regulations 2020 were introduced. The cap is part of a wider set of reforms intended to restrict public sector pay and pensions.
For more details of the scope of the Regulations, the payments that count towards the cap and the circumstance when the cap can be waived, see our earlier Public Sector Exit Payments article.
The Regulations are proving tricky for employers to apply. In particular, the pensions implications appear not to have been considered until the last moment (resultant legislation is still in the consultation stages). There are specific difficulties in applying the cap:
- Difficulties in formulating a business case for the discretionary waivers as exceptions to the cap are considered narrow.
- Difficulties in commercially settling weaker claims.
- Unexpected impact on lower earners of a certain age with the potential for age discrimination claims. There is, intentionally, no lower earnings threshold under which the cap does not apply and employer pension top up payments are included in the cap. This means that the cap could impact long serving lower earners such as cleaners and care takers. By way of explanation, an individual aged 55 and above (with at least 2 years’ service in for example the LGPS and subject to a redundancy) will be entitled to, and must take, their LGPS benefits immediately without any reduction to reflect early receipt. This usually has a significant employer cost implication that could absorb most of the cap or even exceed it.
- There is currently a mismatch between the cap on exit payments and pension scheme provisions with potentially unfair and messy consequences for employers. For example, there could be a situation where an LGPS fund is forced to pay an unreduced pension on early retirement redundancy but is unable to recover the resultant employer top up payment from the relevant employer because the cap prevents the employer from making that payment. In that case, the shortfall in employer top up payment would go into the fund deficit to be paid by all scheme employers – this could result in employers picking up the costs of other employers’ exit arrangements.
- It is down to the relevant Government department to notify HM Treasury that a particular body should be on the list of entities which are subject to the cap. This could potentially lead to discrepancies in application of the cap legislation.
- The cap legislation is currently being challenged by way of Judicial Review by certain unions and the British Medical Association, broadly on the basis it created a half implementation situation in terms of pensions, is ultra-vires in its retrospectivity, and cannot override nationally negotiated doctor contracts or EU law on peaceful enjoyment of a possession namely the redundancy early retirement right.
- The implications of the McCloud judgment on age discrimination are yet to be considered by HM Treasury in relation to the cap legislation, giving rise to more complexity and uncertainty.
Recommendations to employers
- Review your contractual arrangements to ensure they reflect the cap legislation bearing in mind the uncertainties.
- Be aware of the current mismatch between the Regulations and provisions of certain of the public service pension schemes and either delay reorganisation exercises until the position is clarified or chart your course of action which may include for example paying only a portion of the pension top up cost.
- Be clear with the employee what your proposed course of action is, and trade union representatives should be involved in those discussions, particularly where payments are delayed. Be aware that there may be tax implications to your course of action.
- Be familiar with the accompanying HM Treasury guidance (includes a pro forma for completing the case for discretionary waiver) and Directions (revisable from time to time) – each published in December 2020 – which must be considered alongside the cap legislation.
- Be aware of the cap waiver criteria and process, as well as record-keeping and disclosure requirements.