If the cap doesn't fit: government backtracks on exit payments

On 4 November 2020, the Restriction of Public Exit Payments Regulations 2020 (the Regulations) came into force; exit payments for the public sector were capped at £95,000.

This cap was due to affect all of the public sector and affects both employees and office holders. However, on 12 February 2021, the Government issued a Treasury Direction disapplying the cap due to 'unintended consequences' and will revoke the Regulations. That does not seem to be the end of the story as the Government has said that it plans to bring forward proposals quickly to address 'unjustified exit payments'.

What was the cap?
The £95,000 cap implemented by the Regulations applied to payments made to an employee or office holder in connection to their loss of employment or office in the public sector. The cap applied to the aggregate of payments to be made.

Where an individual received two or more exit payments in a 28-day period, they could not receive more than £95,000 in total.

Who was covered by the Regulations?
The Regulations were intended to encompass the majority of the public sector namely:

• local government (which includes fire authorities and maintained schools);
• academy schools;
• the NHS;
• police forces; and
• the UK civil service.

Registered providers of social housing, arms-length management organisations and services outsourced by public bodies were not covered by the Regulations.

What exit payments were covered by the Regulations?
The cap applied to any payment made in connection with the termination of employment or a loss of office. However, certain payments were not considered exit payments by the Regulations. This included:

• any death in service payments;
• payments made due to incapacity as a result of accident, injury or illness (including any injury to feelings);
• payments in respect of untaken annual leave;
• payments in relation to a court or tribunal order; and
• payment in lieu of notice where the payment was no more than 25% of the person’s salary.

Redundancy payments, in general, were subject to the cap. However, the cap did not apply to:

• statutory redundancy pay; and
• redundancy pay paid to a person who is excluded from statutory redundancy pay because they hold a public office (for example, crown servants).

Were pensions affected by the cap?
Members of local government pension schemes (LGPS) may elect to retire before the normal pension age, provided they are aged 55 or over. In such cases, employers may make additional contributions to the pension scheme so that the benefit received by the member is not reduced. These are known as pension strain payments. Similarly, an employee aged 55 or over who is made redundant is required to receive their pension benefit early and, in that circumstance, the employer is required to make a strain payment.

The Government noted in its response to the consultation on the Regulations that employer-funded early retirement tends to be the most costly element of exit payments that are typically funded by the taxpayer.

It was intended that pension strain payments would be subject to the cap. As a result, strain payments could be reduced and, consequently, a member’s pension could be actuarially reduced. The expectation was for scheme members to be given the option to either make up any shortfall using their own funds or to accept the partially reduced pension or choose to defer their pension until a later stage.

Could the cap be relaxed?
Certain bodies, such as local councils and fire authorities, did have the ability to relax the cap. For any non-Welsh public body to do so, it had to either obtain consent from the Treasury or comply with any directions given by the Treasury.

MHCLG Regulations
The MHCLG carried out a consultation proposing further reforms to redundancy payments for the Public sector. The key proposals were:

• a maximum payment of 3 weeks’ pay per year of service;
• a maximum of 66 weeks’ or 15 months’ salary that could be paid as a redundancy payment, with employers having the ability to apply lower limits at their discretion;
• a maximum salary that redundancy payments could be based on. The maximum salary would start at £80,000 and will be reviewed annually, and
• the LGPS would be amended to allow members who are made redundant at age 55 or above to make up any reduction in the strain payment. The member would otherwise receive a pension that is actuarially adjusted in line with any change to the strain payment made by the employer.

The consultation ended on 9 November 2020.

Why was the cap disapplied and the Regulations revoked?
The announcement from the Treasury states that it was disapplying the cap with immediate effect and will revoke the Regulations due to possible 'unintended consequences'. It doesn’t however make clear what those unintended consequences were.

It is likely that a number of judicial reviews were brought by Lawyers in Local Government (LLG), the Association of Local Authority Chief Executives and Senior Managers (ALACE), GMB Union and the British Medical Association were instrumental in this conclusion. LLG and ALACE identified that there had been procedural flaws in bringing forward the Regulations and also that the cap would affect 86% of local government officers over the age of 55. They also commented that this amounted to a retrospective removal of pension benefits.

Other flaws in the Regulations included the situation where an employee was contractually entitled to payment but the payment was capped. A claim could have been brought against the public body to seek to recover any money lost as a result of the cap. In such circumstances, a successful claim for compensation could have meant that the public body was ultimately ordered to pay the full, uncapped amount to the employee.

What is the position where exit payments have already been paid and capped?
The Treasury direction encourages employers to retrospectively payout sums that would have been due if the cap had not been in place and says that the Treasury’s expectation is that employers will do so.

Will this be the end of the matter?
It seems unlikely given that the Treasury Guidance says that it “will bring forward proposals at a pace to tackle unjustified exit payments.” Precisely what an 'unjustified' exit payment remains to be seen.

Key points to take away

• Public sector bodies will need to consider whether to pay out in full exit payments already made that were capped.
• Public sector bodies should not apply the cap to exit payments going forward.
• Watch this space for further action on 'unjustified' exit payments!

For more information 

If you have any queries regarding this article or any other queries around termination payments, please contact Matt Gregson and Doug Mullen.