Following the introduction of the Public Sector Exit Cap regulations, which came into effect on 4th November 2020, and pending the introduction of the revised LGPS regulations, there is a period of time where uncertainty exists regarding redundancy and efficiency exits for LGPS members aged 55 or over.
A conflict now exists between the exit cap regulations and the LGPS regulations for cases where the cap is breached following the exit of an LGPS member age 55 or over. The LGPS regulations still require the member to take payment of an unreduced pension, but the exit cap regulations prevent the employer from paying the full strain cost.
The administering authorities of the Devon County Council Pension Fund and Somerset County Council Pension Fund have implemented a policy for determining the pension to be paid in scenarios whenever the exit cap is breached.
Considerations and Risks
The administering authority is required to decide whether to pay an unreduced pension in line with regulation 30(7) or provide the option of either a deferred pension under regulation 6(1) or an immediate reduced pension under regulation 30(5) in line with the Government’s recommendations.
If we elect to pay an unreduced pension in line with regulation 30(7), there is a risk that we could end up in the position of having to attempt to recover monies from the employer and/or the member.
The Scheme Advisory Board (SAB) has obtained legal advice to help inform any decision taken by the administering authority. A commentary on the legal advice can be found on the Public Sector Exit Payments page of the SAB website:
The policy was also constructed taking into consideration the letter issued to LGPS administering authorities from MHCLG dated 28 October 2020.
The SAB have recommended that a deferred or immediate reduced pension is offered to any affected member, based on the considerations set out below; however, we have the discretion to make our own independent decision:
- You will not be able to obtain the whole strain cost from the employer. The employer will be restricted to a maximum of £95k for all exit payments including the strain cost. If the employer has paid a cash alternative, they are unlikely to be able to pay any strain cost. The recommendation to the employer is that they do not pay the cash alternative to the member. If the employer decides to pay the cash alternative, they must notify you.
- If you cannot obtain a strain cost at the time of the exit, you should discuss with your actuary what options are open to you to ensure the benefits are fully funded in the future. You should be aware that there is a serious risk that you will not be able easily or quickly to make good the absence of the strain cost.
- You may also be at risk of challenge under the doctrine of implied repeal which, if proven, would result in you having to seek repayment of the overpaid element of the pension. The doctrine of implied repeal provides that where a piece of legislation conflicts with an earlier one, the later legislation takes precedence.
Offering a deferred or reduced pension also risks challenge from the member seeking to enforce their rights under regulation 30(7). Regardless of the outcome of any challenge, this approach should result in the member receiving additional monies as:
- an unreduced pension, or
- a cash alternative payment to the member, or
- a cash alternative paid to you to provide additional pension under regulation 31 or to waive reductions under regulation 30(8).
In addition to the above, we have discussed the appropriateness of our current strain cost calculations with the fund actuary. As our current methodology has not been reviewed for some time, we feel that it is reasonable to adopt the latest draft methodology published by the Government Actuary Department (GAD) in September 2020.
Exit Cap Policy
Taking the above factors and risks into consideration, we have determined that the actions set out below are the most suitable approach for processing exits during the interim period while the regulations are in conflict.
1) Any member affected by the exit cap during the intervening period will be offered the option of either a deferred or immediate reduced pension.
2) Employers covered by the regulations will be restricted to a maximum of £95k for all exit payments, including the strain cost. If the employer has paid a cash alternative, they must notify Peninsula Pensions immediately as they will be unlikely to be able to pay any strain cost.
3) If we are unable to obtain a strain cost at the time of the exit, we will discuss with the fund actuary what options are available to ensure that the benefits are fully funded in the future.
4) For any exits that are currently in progress, employers will be asked to check and confirm the status of any exits already in progress where the leaving date is on or after 4th November 2020.
5) If we are notified by an employer that the cost of an exit will exceed the cap and a member has already been provided with a formal pension quotation, we will contact the employer to advise them of the revised options available to the member.
6) The revised draft factors used for the calculation of strain cost calculations, published by the Government Actuary Department (GAD) in September 2020, will be applied to all capped and non-capped employers and for flexible retirements where the employer waives the reduction.
7) The process for dealing with new exits during the interim period is set out in Appendix 1.
Appendix 1 Peninsula Process for New Exits
These steps will be taken in the event that we are notified that an LGPS member age 55 or over has left due to redundancy or business efficiency on or after 4th November 2020.
The employer will be asked to confirm whether or not they are covered by the cap (they can check the Schedule at the end of the Restriction of Public Sector Exit Payments Regulations 2020). If they are not, we will proceed as normal. The member is entitled to unreduced benefits and a strain cost will be requested from the employer in line with current processes.
If the employer is covered by the cap, we will calculate a full strain cost
quotation in respect of new exits for members who would normally qualify for benefits under regulation 30(7). The cost will be provided to the employer and the employer will be asked:
• Does the member’s total exit package exceed the cap?
• If it does, have you applied for a waiver?
Peninsula Pensions will not be involved in any decision regarding the breaching of the cap as those regulations apply to the employer alone and any sanctions for a breach will be on the employer alone.
Employers will be required to notify Peninsula Pensions of any waiver request, and whether the waiver application has been successful. Until and unless the employer confirms that any waiver has been successful, we will continue to assume the member exceeds the cap.
If the employer informs Peninsula Pensions that the total value of the exit payments (including strain cost) is less than or equal to £95,000, or that a waiver application has been successful, go to Step 3.
If the employer informs you that the total value of the exit payments (including strain cost) is more than is more than £95,000 go to Step 4.
If the employer informs Peninsula Pensions that the total of the exit payments is less than or equal to £95,000 or that a waiver request has been successful, the exit will be processed as normal. The member is entitled to unreduced benefits and a strain cost will be requested in line with current process.
If the employer informs Peninsula Pensions that the total exit payment is over £95,000 and the cap will not be waived, we will notify the employer that the member will be offered the option of a deferred pension or a reduced pension. The employer must decide whether to make a cash alternative payment under regulation 8 of the exit cap regulations. The aggregate of that cash payment and any other exit payments must not exceed the cap.
The employer will be informed that decisions made by the administering authority and employer are open to challenge and could be reversed. It is important that the employer understands that a successful legal challenge could result in a request for a strain cost payment. The employer should understand the implications of making an immediate cash alternative payment, or deferring payment until the result of any legal challenge is known.
The member will be notified of their option for either a deferred or a reduced pension and their right of appeal. A record of all cases will be maintained where an appeal might be received. These cases may need to be reviewed again once a resolution is known.
If there is no claim or the member is unsuccessful in that claim, we will inform the employer who can then pay the cash alternative:
• to the member, or
• to the administering authority to purchase additional pension for the member under regulation 31, or
• to the administering authority to waive early payment reductions under regulation 30(8), if the member has elected for immediate payment.
If the outcome of a claim is an order to pay the unreduced pension, we will inform the employer and request the full strain cost. It will be for the
employer to determine how much, if any, of that cost it can meet under the
exit cap regulations.