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Following regulations being laid over the summer implementing a
cap of £95,000 on exit payments for public sector employees,
the Ministry of Housing, Communities and Local Government (MHCLG)
is consulting on the impact of the proposed reforms to exit
payments made to local government employees. This includes changes
that will affect redundancy payments and the early retirement terms
available on redundancy.
You can read a copy of the consultation document
here. The consultation will close on 9 November 2020.
Key action points
1. Review how these changes may affect your business and
resource planning
Whilst the changes to the possible range of exit terms are still
at the consultation stage, the exit cap is anticipated to come into
effect towards the end of this calendar year. The exit cap will
apply to all exit payments associated with loss of employment,
although the local government consultation is focussed primarily on
redundancy issues. This means that the changes may affect employee
exits anticipated before the end of the fiscal year.
For Local Government Pension Scheme (LGPS) employers whose
workforce includes individuals who have transferred from local
government under one or more service contracts, employers will need
to review how the proposed regime will affect those employment
terms, if at all. Those employers should also consider the extent
to which they will be required to have regard to the principles of
exit payment caps, either as a result of their service contract
with the local authority or wider legal obligations.
2. Communications
The proposals in relation to older employees who would
automatically take an immediate pension under the current
legislation are likely to involve some complex choices for those
individuals. We anticipate such individuals are likely to need
specialised financial advice to understand the relative merits of
different elements of their redundancy package and the impact on
their future pension of any particular course of action.
Decisions made as a result of these choices will have long-term
ramifications for individuals’ retirement and future financial
health. In light of the focus in regulating private sector pensions
to promote high quality communication and informed financial
decision-making to support the policy of member choice, in giving
LGPS members these choices there also needs to be systemic measures
in place to enable timely and well communicated support for
individuals making decisions that will affect their financial
health in retirement. This raises the question as to whether access
to independent financial advice will be required for member and who
will pay for it.
3. Consider responding to the Consultation
The consultation is aimed at understanding the impact these
changes may have on the local government workforce and the effect
the changes will have on the regulations currently governing exit
pay and early retirement terms. It is primarily a consultation to
seek information about impact the proposals will have. It is not a
consultation about the wider policy of exit pay reform.
Background to the Consultation
The consultation is part of the wider pack of reforms to public
sector exit payments, which was initiated by the 2015 Spending
Review. The ultimate measures that are put in place through
secondary legislation will underpin the implementation of the
£95,000 cap on the total value of exit packages.
How will LGPS be affected by these changes?
The key proposed changes for LGPS pension benefits are:
- the removal of mandatory early retirement following redundancy
where the member is aged 55 or over; and - the provision of options for employees as to how and when they
take their pension benefits following redundancy.
The proposals will require employees to carefully consider the
advantages and disadvantages of different elements of their
redundancy package as where an employer pays additional pension
costs, an employee may no longer be entitled to receive any
discretionary redundancy payments.
The proposals set out the following proposed reforms to early
retirement terms:
- Where a member wishes to retire the “strain” cost of
that early retirement will need to be assessed against the
£95,000 cap on the total value of any exit package. - Where the member has received redundancy payments (including
statutory redundancy payments) or benefitted from his employer
purchasing additional pension, those amounts will reduce the
available amount of the exit payment cap that can be paid by the
employer to fund the costs of the early retirement pension. - Where an employer pays any amount of pension strain cost, the
employer may not pay a discretionary redundancy lump sum, except in
circumstances where the discretionary redundancy payment would have
been greater than the pension strain costs. - Where the strain costs are greater than can be provided within
the cap value, there will be an option for members to
“buy” out the additional early retirement costs, with the
member meeting that amount from their own resources. It is unknown
at this stage whether the pricing of early retirement costs will be
prohibitively costly such that it is may not represent a viable
choice for any but a small minority of members. - Where the additional pension costs are not met, the member will
have the option of an actuarially reduced early retirement pension
or to become a deferred member of the LGPS. - MHCLG will provide for actuarial guidance in calculating strain
costs to ensure consistency across LGPS Funds.
Redundancy compensation payments
MHCLG is proposing that the calculation of redundancy
compensation payments is subject to certain maximum tariffs or
values including a maximum salary on which a redundancy
compensation payment may be based, a maximum number of months’
or weeks’ salary that can be paid and a maximum multiple of pay
per year of service. The consultation acknowledges that employers
will retain a discretion to apply lower limits / calculation
factors.
Re-engagement of LGPS pensioners
Local authorities may have recently reviewed their policies as a
result of COVID-19 and re-engaging former retired health and social
care workers to ensure sufficient capacity to deliver key services
during the pandemic. The reform proposals will require local
authorities to consider their pay policies and their pensions’
abatement policies for ex-employees who are re-engaged whilst in
receipt of a LGPS pension.
What does this mean for now?
For the moment, there is no immediate action for employers to
take. However, public sector employers and those employers
participating in the LGPS will need to review their policies and
procedures when the detail of the changes become available and
consider the impact of employee choice for those aged 55 or
over.
Read the original article on GowlingWLG.com
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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