Local government exit payments: cap in hand?

Estimated reading time: 5 minutes

A few weeks ago we published a blog about the regulatory conflict for members over the age of 55 being made redundant from relevant employers, and describing the options available to them. A lot has happened since then, and administering authorities, employers and advisors are begging for clarity and certainty.

What’s the problem?

The wider exit cap regulations* came into force on 4 November but complementary and consistent LGPS regulations are still some way off. 

The consultation on the proposed reforms for the LGPS closed on 9 November 2020 but Local Government Pension Scheme (LGPS) draft regulations** are still under consultation until 18 December 2020. Even if there are no substantial revisions, we can’t realistically expect finalised regulations to be in force before the middle of January 2021.

As things stand there is a serious inconsistency between the exit cap regulations that employers have to adhere to and the LGPS regulations that bind administering authorities and employers. 

What’s been happening?

On 28 October 2020 the Ministry of Housing, Communities and Local Government (MHCLG) wrote*** to administering authorities. The MHCLG recommended that they act consistently with the exit cap regulations and rely on the existing LGPS regulations 30(5) that allow members to elect to take an immediate reduced pension over the age of 55. 

This overlooks regulation 30(7), one whole sentence away, that requires the member to take their pension, unreduced and immediately on being made redundant over the age of 55. A number of parties have already set out legal challenges, perhaps not being satisfied to break the law in a limited and specific way. 

The Scheme Advisory Board published a commentary on legal advice**** on 30 October 2020 to assist LGPS administering authorities and scheme employers in considering what action to take.

On 4 November 2020 the Restriction of Public Sector Exit Payments Regulations 2020 (‘the Cap Regulations’) came into force regardless and so, until amended LGPS regulations are eventually enacted, stakeholders are in very tricky territory, having to balance the risks of complying (or otherwise) with any set of rules. Whatever course of action administering authorities and employers opt for leaves them open to legal challenge and possibly having to later unwind whatever they have done.

What can we do about it?

The Local Government Association (LGA) has now published guidance in the form of exit cap information for LGPS employers^ and for administering authorities^^. 

The guide for employers goes step-by-step through employer obligations and decisions under the exit cap regulations now in force. In particular, it sets out the risks of making a cash alternative payment at the moment. 

The guide for administering authorities sets out the decisions which authorities need to make now including a very useful step by step guide that will help with liaising with scheme employers.

Administering authorities and employers should take urgent legal advice if they find themselves with any members that will be affected by the cap before the regulatory conflict is resolved.

Administering authorities should, without delay, decide on a policy for paying pensions to members affected by the exit payment cap, following the LGA guidance. 

How to calculate the strain cost? 

Calculating the relevant strain cost will be a critical step in working out the choices for affected members. Draft factors^^^ are available from the Government Actuary's Department (GAD) but will almost certainly be different to the fund’s current factors, which should be consistent with the ongoing funding assumptions and may or may not have been reviewed recently. 

These draft factors are not required to be used (yet) for affected (capped) employers, and are not required at all for uncapped employers, but many funds will be considering whether to use a single set of factors for simplicity. 

However, without an up to date assessment and comparison of fund-specific factors and GAD factors, it will be difficult to deal with any challenges to the strain factors chosen, whether by capped employers facing different strain costs under a new approach or by uncapped employers who may perceive beneficial factors being applied to other employers’ strain cost calculations. 

"We recommend that all administering authorities should discuss the fund’s current factors with their actuary to understand the implications of changing to a new set of strain factors for some or all employers."

Many funds are now using our exit cap modeller which will be useful to help understand the impact of the factors for individual members, particularly where there are logistical difficulties in amending the factors held by administration systems. 

Your usual Barnett Waddingham contact will be able to provide more information about how the modeller can be used to complement your existing processes and to provide relevant information for employers and members.  

In conclusion

There is no unequivocal best option for administering authorities, employers or members. The hasty approach to implementing exit pay reform is adding a very unwelcome layer of uncertainty and confusion at an incredibly difficult time for members facing redundancy. A well-documented decision process will be essential as we face another beleaguered set of regulatory reform.  

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