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Public Sector Exit Pay Cap - What Does it Mean for Public Sector Organisations and Employees?

on Wednesday, 02 December 2020.

The Government first announced its intention to introduce a cap on public sector exit payments in 2015 and legislation allowing for the introduction of a cap was introduced in 2017.

However, nothing then happened until the Government opened a consultation, Draft Restriction of Public Sector Exit Payments Regulations 2019, in April 2019.

The consultation closed in July 2019 and we now know that that cap shall be effective from 4 November 2020 by virtue of The Restriction of Public Sector Exit Payments Regulations 2020 (the Regulations). On 29 October 2020, the Government published guidance and directions to accompany the Regulations.

Which Bodies Does the Cap Apply to?

The Regulations apply to public sector bodies, including academies, with some limited exceptions (for example, the armed forces). The bodies to which the Regulations apply are listed in Schedule 1 of the Regulations.  Some publicly funded bodies, however, are not caught by the new rules, including universities.

What Payments Are Affected?

The Regulations limit the total exit payments that can be made to public sector employees to £95,000.

The cap includes most payments paid on exit, including:

  • redundancy payments
  • payments in lieu of notice due under a contract, which exceeds one quarter of the relevant person's salary, including benefits in kind
  • 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')
  • any payment in the form of shares or share options
  • 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

What Payments Are Excluded From the Cap?

Payments in respect of the below are excluded from the cap:

  • death in service
  • incapacity as a result of accident, injury or illness
  • annual leave due under a contract of employment but not taken
  • compliance with an order of a court or tribunal

There are also specific provisions relating to the Firefighters' Pensions Schemes and the judiciary.

The guidance confirms that payments - or elements within payments - that result from an individual’s accrued right to a pension, including additional pension purchased with the individual’s own monies or lump sums received from the scheme on retirement, are not exit payments for the purpose of the cap.

How Is the Cap Applied?

The Regulations do not prescribe the order in which payments made to an individual should be capped. However, where a 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.

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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 waiver in each case and supported by evidence. The relaxation of the cap should be disclosed in the organisation's annual accounts.

Discretionary Relaxation

Discretionary relaxations may be granted in exceptional circumstances where the application of the cap causes particular hardship to an individual, or to give effect to urgent workplace reforms, or because there was a written agreement regarding an exit package which was concluded before the Regulations came into force.

Mandatory Relaxation

The Regulations set out that the cap must be relaxed in certain circumstances, namely where:

  1. an exit payment is made as a result of the application of TUPE
  2. a payment is made to avoid employment tribunal litigation in relation to: a detriment or dismissal due to whistleblowing and/or a detriment or dismissal as a result of carrying out activities in connection with preventing or reducing risks to health and safety at work; as a result of a complaint under the Equality Act 2010 (ie discrimination)

However, it is clear that employers are expected to carry out an analysis of the relevant law in relation to any relaxation authorised under (2) above to assess the merits of the claim and the risk to the organisation in order to justify any such payment as value for money. This may include a requirement to get legal advice, which should then be provided to the minister responsible for authorising or rejecting the application.

What Does This Mean?

This inclusion of payments into pension schemes means that the Regulations will affect long-serving, lower-earning employees, rather than just high earners.

This was a concern raised by a large number of the respondents to the Government's 2019 consultation. However, the Government included employer-funded early access to pensions in the cap on the basis that this was often the most costly element of an exit payment and is ultimately funded by the taxpayer, so it is right that it is included.

The introduction of the cap is likely to have significant implications for public sector organisations employees where there is a need for restructuring of management teams or other employees.

What Happens Where the Regulations 'Clash' with Other Legislation and/or Pension Scheme Rules?

One significant area of challenge and criticism is that the Regulations have, since the 2019 consultation concluded in any case, been rushed through without due consideration for the impact on other legislation. The Regulations state that they take precedence over contractual rights and other legislation or rules (except where such legislation or rules are more stringent than the Regulations).

Notably, as things stand, the Regulations conflict with the LGPS rules, which in certain circumstances, permit members over the age of 55 to be afforded early retirement without actuarial reduction of their pension. It would seem that, where the cap applies and would be exceeded by the payment of a pension strain cost to the scheme, the employer cannot make the pension strain cost (at all, or in full).  However, pending the amendment to the LGPS, and as things stand, the employee is likely to remain entitled to their full pension entitlement, without actuarial reduction.

As things stand, the provision in the Regulations around how the pension strain costs would be met in circumstances where the cap has been exceeded is not clear and we would recommend the taking of legal advice. This issue is the subject of on-going legal challenge.

The guidance notes that the Government expects compensation scheme rules and pension scheme rules to be amended to reflect the introduction of the cap. There is an ongoing consultation concerning reform of the LGPS by the Ministry of Housing, Communities & Local Government (MHCLG). This is due to close on 9 November 2020 and, of course, any changes introduced will not be immediate.

What Should Public Sector Employers Do?

We know that the Regulations are the subject to some on-going judicial review challenges. However, they shall come into force on 4 November 2020 and employers will need to be familiar with the legislation, and guidance.

The MHCLG consultation is due to close on 9 November 2020; it is unclear when the changes may come into effect. Given that the changes proposed to the LGPS are significant and would have a dramatic impact on entitlements, even for modest earners, there may be a window of opportunity to implement restructures/redundancies in respect of LGPS members before the changes come into effect.

However, the timeframe is uncertain and employers would need to be clear that exit payments shall be made in accordance with legislation in force at the relevant time.


For specialist legal support with the exit pay cap, please contact Charlotte Rose in our Employment Team on 07741 311065, or complete the form below.

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