The £95k cap: LGPS consultation widens the scope of public sector reforms

Estimated reading time: 6 minutes

As you may be aware, new regulations* are due to come into effect over the next few weeks around the much debated £95k cap on exit payments.

These regulations, laid by HM Treasury (HMT), set out the general rules that must be applied to the public sector and there is currently an ongoing consultation** on how the £95k cap should apply specifically to local government, alongside wider reforms of exit payments.

Preparing for the new regulations

The proposals, set out by the Ministry of Housing, Communities and Local Government (MHCLG) are of immediate relevance to English Local Government Pension Scheme (LGPS) funds and we recommend that these funds ensure their employers are aware of the potential changes that are afoot, and that any relevant retirement illustrations are caveated to this effect. It remains to be seen how the devolved governments of Scotland, Wales and Northern Ireland will take matters forward.

The bodies covered by the £95k cap are set out in the HMT regulations. Those affected by the wider reforms to exit payments set out in MHCLG’s latest consultation will be covered by new Local Government Compensation Regulations, a draft^ of which has now been made available. As far as the LGPS is concerned, it appears to be predominantly councils and academies that will fall under the scope of both sets of reforms.

The consultation is due to close on 9 November after which we expect revised LGPS Regulations to be put in place alongside full and final guidance from MHCLG and the Government Actuary's Department (GAD) on the application of these regulations.

Does the £95k cap fit?

This does, however, bring into existence a potential conflict between the two sets of regulations, where both are applicable and where a member over the age of 55 is made redundant. The HMT regulations will come into force on 4 November which is likely to be before the revised LGPS regulations are up and running, so in the intervening period there will be a simultaneous obligation that:

Funds must pay out unreduced pension benefits to the member immediately, including that element above the £95k cap, in line with the current Regulation 30 (7)^^
Employers must not fund any element of the strain cost above the £95k cap

This presents something of a conundrum and one which is required to be resolved urgently in order to prevent administering authorities being exposed to legal risk. We hope that further guidance will be forthcoming from MHCLG to address this issue.

How will members be affected?

What is clear from the latest proposals is that more members are likely to be affected by the cap than perhaps originally envisaged.

For example, as the proposals are currently written, even in cases where the total value of the exit package comes in at less than £95k, some members who are made redundant with an early retirement strain cost becoming payable, would still have their pension reduced by an amount based on their statutory redundancy pay. It is also likely that no additional discretionary pay would be permissible.

Our thoughts on this are that it appears to go well beyond the Treasury’s expectations when they set the ball rolling on these reforms and will have the politically undesirable effect of penalising low earners. You could be forgiven for asking why a member, whose exit package is nowhere near the £95k cap, should be expected to, in effect, give up all of their redundancy pay - particularly when an element of it is statutory. We fully expect this will be a bone of contention in the ongoing consultation.

Furthermore, the proposals outlined by MHCLG set out a number of new options that would be available to members who are made redundant above the age of 55. The main options on the table at the moment are summarised below, for employers that will fall under both sets of reforms.

The options for members

	Member draws pension immediately with partial reduction and takes statutory pay as cash	Member draws pension immediately with no reduction but in exchange for statutory pay	Member draws pension immediately with reduction based on additional payment made by member	Member draws benefits immediately with full reduction	Member defers benefits with no immediate reduction
When allowed?	If pension strain does not exceed £95k cap	If pension strain does not exceed £95k cap	If pension strain exceeds £95k cap	Always	Always
Retirement benefits taken when?	Immediately	Immediately	Immediately	Immediately	At some later date
Pension benefits	Reduced by an amount based on statutory redundancy pay	Taken in full	Reduced by an amount based on the value of additional member payment	Full reduction	Taken in full at normal retirement age, otherwise early/late retirement factors apply as usual
Statutory redundancy pay	Taken in full	None, unless it exceeds the strain cost in which case the difference is payable as a lump sum	None	Taken in full	Taken in full
Discretionary compensation	None, unless it exceeds the strain cost net of statutory pay, in which case the difference is payable as a lump sum, subject to new compensation limits and overall £95k cap	None, unless it exceeds the strain cost net of statutory pay, in which case the difference is payable as a lump sum, subject to new compensation limits and overall £95k cap	None	Taken in full, subject to new compensation limits and overall £95k cap	Taken in full, subject to new compensation limits and overall £95k cap
Additional payment from member	None	None	Any amount up to the excess of strain cost above £95k cap	None	None

A model to understand the impacts

To help you make sense of all of this, we have been hard at work developing a modelling tool which illustrates the estimated impact of the proposed changes on a member’s exit package, while recognising that the current proposals are subject to change as the consultation progresses and as further guidance materialises.

The tool lets you compare and contrast the various options outlined above for any member who could be affected by both sets of reforms. Indeed, we are hearing that employers are already beginning to raise queries with funds regarding the new reforms so we expect that being able to provide such illustrations will help the process of engaging with them.

If this is something that you would be interested in then of course feel free to get in touch with your usual Barnett Waddingham contact and they would be pleased to provide you with further information.

The need for clarity

It goes without saying that all of the various options outlined above are likely to create additional confusion for members, especially in the midst of what will be difficult personal circumstances.

How do they decide which option is best for them? To what extent will administering authorities need to offer member advice around these options? And, later down the line, might there be a risk of funds being challenged by members who make the “wrong” decision?

All in all, the proposals set out in this consultation raise a number of uncertainties and these will need to be fully addressed before the reforms come into fruition, which are expected all too soon.

*https://www.legislation.gov.uk/ukdsi/2020/9780348210170

**https://www.gov.uk/government/consultations/reforming-local-government-exit-pay

^h ttps://www.lgpsregs.org/schemeregs/consultations.php

^^https://www.lgpsregs.org/schemeregs/lgpsregs2013/timeline.php#r30