In with a bang: cap on public sector exit payments from 4 November 2020

The parliamentary processes are complete and the Restriction of Public Exit Payments Regulations 2020 (“the Regulations”) which cap exit payments in the public sector at £95,000 will be in force from 4 November.

This follows Government consultations in April 2019 (read our ebriefing here) and draft Regulations earlier in the summer. The Regulations will not be introduced in a two-stage process as was suggested in the consultation process; they will affect all public sector from their implementation. There are neither guidance nor directions accompanying the published Regulations, so we have yet to understand the Government’s approach to the waiver process or current exits in progress. In addition, consultation is ongoing on necessary changes to the Local Government Pension Scheme (LGPS) rules to accommodate the new cap. This consultation which opened in September 2020 will not end until 9 November 2020, after the introduction of the exit payment cap. This lack of “joined-up thinking” may prove problematic for local authorities who may face pension payments that exceed the cap and which, under the LGPS scheme rules, they are required to pay.

What is the cap?

These regulations implement a £95,000 cap on exit in the public sector. The cap will apply to the aggregate sum of payments made in consequence of the termination of employment.

The cap will also apply where two or more relevant public sector exits occur in respect of the same person within any period of 28 consecutive days – the total amount must not exceed £95,000.

Who is covered by the Regulations?

The Regulations intend to encompass the majority of the public sector namely:

• local government (includes fire authorities and maintained schools);
• academy schools;
• the NHS;
• police forces; and
• the UK Civil Service.

A full list of those bodies covered by the Regulations is listed in the Schedule to the Regulations which can be found here.

What about pensions strain payments?

The consultation raised concerns about the inclusion of pension top-up payments being included in the scope of the exit payment cap. It was argued that it could affect long-serving lower-earning employees and that it could potentially be discriminatory towards older workers. However, this will not change when the legislation is implemented. The Government’s response was that it believes it is right to include all payments related to exit within the cap and that employer-funded early retirement tends to be the most costly element of exit payments that is typically funded by the taxpayer.

What about statutory redundancy?

The regulations do not dictate an order in which exit payments should be made with the exception of multiple exit payments made by an employer that includes a statutory redundancy payment. Here employers and employees have some discretion. The Government expects that in these circumstances, employees should receive their full statutory redundancy sum, but expects employers to cap the contractual redundancy lump sum that is in excess of the statutory amount to allow for the full pension top-up and statutory redundancy payment to be paid.

Practical implications

• The cap will take precedent over existing contractual agreements where they are less stringent than the exit payment cap regulations.
• There is an expectation on employers that, employment contracts, pension and compensation schemes should be updated to take the regulations into account.
• Employers in the public sector should look over the different schemes in place and check whether these need to be updated. As stated in our previous ebriefing, your organisation may also want to consider looking into matters such as payment in lieu of notice clauses for executives and gardening leave provisions. Do these enable you to enable your contractual obligation and avoid the cap? It is worth noting that payment in lieu of notice clauses that equate to less than a quarter of an employee’s salary is exempt.

For more information

Please do contact Matthew Gregson for more information and specific advice on these Regulations.

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