Putting the spotlight on pension strain

By Tracey Lee | 22 September 2020

The Government’s plans to impose a cap on public sector exit payments might appeal to those who hold the popular misconception that public sector workers are overpaid, but it could have damaging unintended consequences for local government.

If the Government does not provide full funding to cover councils’ costs and lost income arising from the COVID-19 pandemic, sadly, redundancies are more likely because of its impact on local government finances. But few would have thought that the reward for key workers in councils would be an assault on their pensions and redundancy payments. Treasury legislation to limit exit payments could affect senior environmental health officers who have been working on test and trace or enforcing requirements in restaurants and shops; social workers who work with the NHS to ensure that elderly people are discharged swiftly from hospital; housing officers who found temporary accommodation to move homeless people from the streets; and revenues and benefits supervisors who have processed thousands of grants and rates reliefs for businesses and payments to recipients of council tax reduction support.

This is the insidious effect of the Restriction of Public Sector Exit Payments Regulations 2020 which the Treasury tabled in Parliament, without fanfare, in late July. They await debate in both Houses of Parliament. The regulations look likely to end the 25-year guarantee of no change to public sector pension schemes that was enshrined in the Public Service Pensions Act 2013.

The Association of Local Authority Chief Executives (ALACE) is a union that represents only local authority chief executives and other senior managers. We are working with other unions in local government and the wider public sector – to continue to expose the impact of the regulations; to call, even at this late stage, for a change in Government thinking; and to take steps to ensure that the worst effects of the Government’s plans are mitigated and that local government staff are not unduly affected compared to other public workers.

Since the proposals for an exit payment cap of £95,000 emerged, ALACE has consistently argued that pension strain should not be counted or should be counted in a fair way. It is not money in the pocket of an individual when they are made redundant, but a payment by their employer to the pension fund to remove actuarial reductions that the employee would otherwise face. For many decades, it has been a requirement of the local government pension scheme that individuals made redundant over a specific age (now 55, 50 prior to 2008) should receive their accrued pension in full. Actuarial reductions can be severe: someone aged 55 whose normal retirement age is 67 would see a 44% cut in pension if the employer was not required to pay pension strain. Even for someone made redundant five years before normal retirement age, the cut in pension would be 22%.

In 2019, ALACE identified how the inclusion of pension strain within the cap would affect long-serving staff earning well under £40,000. Real case studies showed how, in one council, the pension strain for staff in their mid-to-late 50s, earning £31,000 to £34,000 and with service in the range of 35 to 39 years would each have pension strain exceeding £100,000 if made redundant. The redundancy payments in each case would be under £18,000. But the Government’s legislation would mean that they would all suffer a cut in their pension, for life.

The Ministry for Housing, Communities and Local Government (MHCLG) recently began an important consultation on reforming local government exit pay: responses are required by 9 November. The MHCLG proposes to limit redundancy payments that individuals can receive. Depending on the scheme currently operated by a council, this could affect all staff as redundancy payments would be limited to 66 weeks’ pay and based on a maximum multiplier of three weeks’ pay for each year of service. It would certainly affect higher earners as the maximum salary to calculate redundancy payments would be set at £80,000.

These proposals are also to be implemented against the backdrop of widespread local government reorganisation. The English Devolution and Local Recovery White Paper is expected to be published before the end of the year, with former local government minister Simon Clarke having said it will ‘redefine the way in which local government serves its communities’. This heralds a wholesale reorganisation of local government in many areas, which will be immensely disruptive and will see many senior local government officers leaving their roles, creating a large burden on councils, a loss of experience and leadership, and putting at risk the delivery of local services at a critical time.

Tracey Lee is chief executive of Plymouth City Council. She writes in her capacity as chair of ALACE

Council workers warned of 'assault on pensions'

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