Public Sector Exit Pay Cap - What Does it Mean for Schools and Academies?
The Government first intended to introduce a cap on public sector exit payments in 2015. However, nothing came into effect until November 2020 when the Restriction of Public Sector Exit Payments Regulations 2020 (the Regulations) came into force.
Update 12 February 2021:
Government announces that the Restriction of Public Sector Exit Payments Regulations 2020, which imposed a £95,000 cap on exit pay in the public sector should be revoked due to having "unintended consequences". The cap shall be disapplied in the meantime. Further updates to follow.
The Regulations limit exit payments in the public sector to £95,000. On 29 October 2020, the Government published guidance and directions to accompany the Regulations.
This cap applies to a range of public sector bodies including academy trusts.
What Payments Are Affected?
The Regulations limit the total payments that can be made to public sector employees at the end of their employment to £95,000.
The cap includes most payments paid on exit, including:
- payments made on account of redundancy (statutory, contractual and any enhanced payments);
- payments in lieu of notice (to the extent these exceed one quarter of the relevant person's salary - in most cases this will be any payments over three months' pay);
- any payment to reduce or eliminate an actuarial reduction to a pension on early retirement or in respect to the cost to a pension scheme of such a reduction not being made (often called 'pension strain costs');
- payments due to extinguish liability under a fixed-term contract;
- voluntary exit payments, settlement payments (including payments pursuant to the ACAS arbitration scheme, save for some limited exceptions), and any other payment, whether under a contract of employment or otherwise, in consequence of termination of employment or loss of office.
The cap does not include any accrued annual leave payments, payments as a result of accident, injury or illness or in compliance with a court or tribunal order.
Does the Cap Apply in All Cases?
The Regulations provide for both a mandatory and discretionary relaxation process in order that the cap may be ignored in exceptional circumstances. Any decision to relax the cap requires specific ministerial clearance and employers must draft a business case, setting out the reason for the relaxation/waiver in each case and supported by evidence. The relaxation of the cap should be disclosed in the organisation's annual accounts.
What Does This Mean in Practice?
The introduction of the cap is likely to have significant implications when planning restructuring or redundancy processes as well as the management of individual cases.
When considering exit arrangements, trusts will need to consider whether the cap is reached. The inclusion of "pension strain" payments into pension schemes means that the Regulations may also affect long-serving, lower-earning employees, rather than just high earners.
The Regulations do not prescribe the order in which payments made to an individual should be capped. However, where a statutory redundancy payment is made and the aggregate exit payments due to the individual exceed the cap, the redundancy payment should be paid in full with one or more of the other payments being reduced, as appropriate.
Trusts will need to review any redundancy or retirement policies to be clear that they are always subject to the Regulations.
One of the particularly challenging areas is the interaction between these Regulations and other legislation or pension scheme rules. In particular the LGPS regulations have not yet been changed and the proposals to do so are subject to an ongoing challenge and judicial review process. This means that there is currently a conflict between an individual's rights under the LGPS rules and the Regulations, and no obvious way of resolving this.
