Getting up to speed on the exit payments cap

The Government has finally capped exit payments made to public sector employees and office holders at £95,000.

The Restriction of Public Sector Exit Payments Regulations 2020 (supported by formal Directions and Guidance) took effect on 4^th November 2020.

• When does the Cap apply?

The cap applies to all exits from local authorities taking effect on or after 4^th November 2020, even if the terms of an exit package in excess of the cap were negotiated before then.

• What needs to be taken into account?

In outline, Local Authorities need to add up the following elements of a proposed package:

• redundancy payment;
• LGPS pension strain payments;
• agreed compensation and severance payments;
• payments in the form of shares or share options;
• payments in lieu of notice in excess of three months;
• payments to buy off the balance of a fixed-term contract; and
• any other payment relating to the termination, apart from:
  • a death in service payment;
  • any payment in respect of incapacity as a result of accident, injury or illness;
  • any payment in lieu of accrued but untaken annual leave; and
  • (significantly)  any payment in compliance with an order of a court or tribunal. 

The Regulations do provide for mandatory and discretionary relaxations of the cap in certain limited circumstances.

There will be a mandatory relaxation where an exit payment is made:

• as a result of the application of TUPE or the ARD (although the Guidance says that this will be subject to review following the outcome of the Brexit negotiations); or
• to avoid a various Employment Tribunal claims (but the full Council needs to be satisfied that an Employment Tribunal would make an award).

Local Authorities can apply for a discretionary relaxation (subject to MHCLG approval):

• on compassionate grounds, owing to genuine hardship;
• where it is necessary to exit the employee or officeholder to give effect to urgent workplace reforms; or
• where the deal was done with an anticipated completion before 4^th November 2020, but the delayed exit was not attributable to the employee or officeholder.

In exceptional circumstances, local authorities can apply for a relaxation of the cap in cases which do not fall within any of these circumstances, by submitting a business case to the MHCLG.

• How does this work with LGPS strain payments?

LGPS strain payments, which may be payable to secure a statutory unreduced pension for departing employees aged 55 or over, can be expensive and could take the overall package over the cap, even after other elements of the package have been reduced as far as possible, and all possible relaxations applied.

The problem is that the Government has not yet amended the LGPS Regulations to allow for the cap.  The MHCLG Consultation on amendments to the LGPS Regulations has been extended until 18 December 2020, so any amendments are unlikely to take effect until the New Year.

The cap could therefore block many exit arrangements pending a change to the LGPS Regulations, although:

• the Regulations also provide that, where the cap means that a full strain payment cannot be made, the employer must make an alternative cash payment, subject always to the cap; and
• the LGA has published a useful guide for local authorities for dealing with this issue:  http://lgpslibrary.org/assets/gas/ew/ExitCap_Erv1.0.pdf .

Conclusion

HR and pensions teams within Local Authorities should familiarise themselves, and Members, with these new rules, and set up processes for managing exit processes to make sure that the rules will be respected.

The Government also needs to make clear amendments to the LGPS Regulations to make sure that they are consistent with the cap rules.

Charles Pallot, Partner at Ashfords LLP