Changes to Unreduced Redundancy Retirement under the new Exit Payment Cap
Who does the exit payment cap apply to?
The Restriction of Public Sector Exit Payment Regulations 2020 came into force on Wednesday 4 November 2020 and applies to all public sector workers including employees of councils (county, borough, town or parish), police and fire authorities and academies. Further education colleges do not count as public sector. A full list can be seen in the schedule to the Regulations.
What is the value of the exit payment cap and what payments does the cap include?
The exit payment cap is set at a total of £95,000. Exit payments include redundancy payments (including statutory redundancy payments), severance payments, pension strain costs - which arise when a Local Government Pension Scheme (LGPS) benefit is paid unreduced before a member's normal pension age - and other payments made as a consequence of termination of employment.
The cap will only apply to those individuals where the combined total value of their exit payments (including pension strain costs) is greater than the £95,000 limit. Where it does apply then the value of the exit payments will have to be reduced to the point where the total value of all exit payments is no greater than £95,000.
What is the pension strain cost and who pays the pension strain cost?
Under the rules of the LGPS, if you choose to receive your local government pension before your normal retirement date, then your pension would normally be reduced, to take into account the fact that you are receiving your pension earlier than your normal retirement date.
However, if you are over age 55 and your employer terminates your contract of employment on grounds of redundancy or efficiency, you would normally be entitled to receive an immediate payment of your pension benefits relating to that employment. This will mean that your employer would need to pay an amount of money into Wiltshire Pension Fund, so that you can receive your full pension, up to the date of leaving, without any reduction in your pension because it has been paid early. The amount of money your employer pays into the Pension Fund, so that you can receive an unreduced pension, is called the pension strain cost.
To qualify for LGPS pension benefits, you must pay into the LGPS for at least two years, or transfer pension benefits from another scheme into the LGPS. If you leave the scheme with less than two years' membership, you may not qualify for LGPS pension benefits and will usually be able to choose to have a refund of your contribution.
How can I find out if my exit payments exceed the £95,000 cap?
If you are currently 55 or over and serving a notice period under redundancy, or you and your employer have entered into a redundancy consultation period, your employer should already have (or will be in the process of obtaining) the amount of the pension strain cost. When they have this, they will be able to establish if the total exit payment costs exceed the £95,000 cap.
What happens now?
If your exit payments do not exceed £95,000, members can receive their pension benefits unreduced
If your exit payments exceed £95,000, the Pension Fund is currently taking the approach of not processing redundancies wherever possible until the wider LGPS regulations amendments have been confirmed (see below).
Please note that you will be notified by your employer if you exceed the exit payment cap, Wiltshire Pension Fund is unable to provide redundancy quotations to members.
Wider LGPS reforms and changes to redundancy retirement
Further to the government introducing the Restriction of Public Sector Exit Payments regulations which came into force on 4 November 2020, further reforms to the LGPS are to be announced imminently (Dec 20 – Feb 21) which will also include greater clarity on how cases which exceed £95,000 should be dealt with.
If you do have any further questions about how the £95,000 exit payment cap may affect you, then please speak directly to your employer.
We will provide further updates to our news section once the LGPS changes to redundancy retirement is announced. Please check back at a later date to find out more.