An update on the £95k exit cap
Estimated reading time: 4 minutes
On 12 February 2021, the Government made what appears to be a dramatic U-turn and announced that the £95k exit payment cap regulations (the Exit Payment Regulations) were disapplied with immediate effect and would be revoked, issuing an HMT Direction Order and guidance.
It is important to note that this applies to England only. The devolved governments will consider and make their own announcements. The Government cited “unintended consequences” as the reason for this U-turn; unintended, perhaps, but not at all unforeseeable or even unforeseen, given the volume of concern and caution from Scheme administrators, professional advisors, advisory bodies and anyone that understood the issue in the first place.
The HMT Direction Order
The HMT Direction Order disapply the Exit Payment Regulations until they can be formally revoked. The guidance provides further explanation and the actions that members and employers are now encouraged to take. It is worth noting that there is only an intention to revoke the Exit Payment Regulations at the moment. These have not been formally revoked as yet and, some elements have instead been disapplied. The Government would need separate legislation to formally revoke the Exit Payment Regulations.
The second issue is whether the Exit Payment Regulations will be revoked retrospectively. This would certainly simplify the position and ensure consistency for all members as this would effectively mean the cap had never existed. However, any cash alternative payments would be ultra vires and so would be an issue.
We understand that the judicial reviews scheduled for 25 March may still go ahead. A letter has been sent to all appellants requesting that these legal challenges are dropped but the appellants might not do so until the Exit Payment Regulations have been formally revoked retrospectively.
What happens now?
For redundancies made on or after 12 February 2021, administering authorities should now pay a full unreduced pension in line with Regulation 30(7) of the LGPS 2013 Regulations.
For redundancies made in the period 4 November 2020 to 11 February 2021 inclusive, the Scheme Advisory Board have issued a copy of their legal advice and their view of the actions that can now be taken, in summary noting that administering authorities may pay unreduced benefits to all members who left during the period and who would have qualified under regulation 30(7), but that they may wish to take their own legal advice before doing so.
Our understanding is that if no cash alternative was paid to the member, the administering authority can now pay the full unreduced pension and request the full strain cost from the employer. However, the administering authority may wish to take legal advice pending revocation of the Exit Payment Regulations.
"The SAB has stated that AAs may take the view that there remains a risk that implied repeal still applies to the LGPS regulations until such time as the cap regulations are revoked retrospectively and/or the MHCLG letter is withdrawn."
Accordingly, such authorities may wish to seek their own legal advice before putting unreduced benefits into payment.
Where a cash alternative payment has been made to a member by an employer, then there is still a full unreduced pension now payable and so the employer will need to try to recover the cash payment. The administering authority should still request the full strain cost of the unreduced pension whether the cash payment is recovered or not. This of course means the employer may end up paying twice, although we understand there are likely to be very few of these cases given that LGA guidance specifically cautioned against this approach. Again, the administering authority may wish to take legal advice pending revocation of the Exit Payment Regulations.
There may also be cases where employees have agreed a settlement because of the Exit Payment Regulations but would now look to be made redundant instead. This is an employer/employee issue, and the administering authority shouldn’t get involved.
Meantime we recommend that Funds check whether they need to review their choice of strain cost factors, particularly where the draft GAD factors had been selected for use in place of Funds’ own factors.
The end of the £95k exit cap?
We believe this is a stay of execution; the Government have said that they will revisit restrictions on early exit costs. It is likely the Government will rewrite the Exit Payment Regulations and then consult again on the new proposals. If the cap does return in some form, we hope that the new proposals will be more carefully considered than the first attempt and address the issues raised by the judicial reviews and others.
Given “proposals at pace” has been quoted a couple of times we expect these proposals to be in a matter of months, not years this time, but that remains to be seen. In the meantime we await news of the amendments proposed to the Compensation Regulations and the previously intended repayment of early retirement monies for high earners on return to the public service within twelve months.
If you would like to talk about this topic, please get in touch with your usual Barnett Waddingham contact to find out how we can support you. Alternatively, please contact me below.
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