The regulations for the Public Service Exit Payment Cap (‘the exit cap’) were laid in late October and took effect from 9 November 2020. These regulations place a limit of £95,000 on the total ‘exit payment’ that can be made when a public sector employee leaves their employment; for reference, ‘exit payments’ include:
- Compensation payments (including redundancy and VERs lump sums); and
- Any ‘strain’ placed on the pension fund for allowing an employee to be paid their LGPS pension benefits early and without reduction
For employees aged 55+ who are made redundant, or dismissed on efficiency grounds, it used to be the case that their pension was paid straight away and without reductions. The new exit cap means that where the cost of paying an unreduced pension early, plus any compensation payment due exceeds £95,000, then an employee’s pension benefits can’t be paid unreduced; instead, their pension benefits will be reduced to the point where the total cost falls within the £95,000 limit.
However, this isn’t the only option available to meet the £95,000 limit; other options include:
- Allowing employees to make up the cost from their personal savings, so that their pension isn’t reduced, or
- Allowing employees to defer taking their pension until a later date
Although the exit cap regulations allow for the above changes to take place, the LGPS Regulations still need to be amended to allow the changes to properly take effect.
The Ministry of Housing, Communities and Local Government (MHCLG) have launched a consultation on the LGPS which includes incorporating the exit cap in to the scheme rules. We will be able to confirm more once we know the outcome of this consultation and will update the EAPF website and include information in a future pensions newsletter – so watch this space!