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Sarah Ward: Good afternoon, everybody. Thank you very much indeed for joining us this afternoon, at this second LGA webinar on the £95,000 cap, the local government exit reform changes. You're all very welcome. This is the second event that we have carried out on this-, on this very complicated, timely and difficult subject. Indeed, something that might make the American elections look quite simple in comparison. So, you're all very welcome. We've got the usual line-up of experts this afternoon to take you through what we know, where we are, what we're doing and where you can find further information. What we have this afternoon is we have with us Naomi Cooke, who is the Head of Workforce. We have Lorraine Bennett, the Senior Pensions Adviser from our Pensions team. We have Jeff Houston with us, who is the Head of Pensions. And we've got Phil Bundy from the Employment Relations Unit. So, a panel of experts to take you through and-, and where we go forward from here. What we're going to do this afternoon is I'm just going to remind you that the slides will go up onto the LGA website after this event.
We are recording it, so that will be available when we've managed to make sure that all the technical details, and everything we need to do to make sure it's as inclusive and accessible as possible, once that's all sorted, we'll load it up to our website, which will probably be some time next week. What we're going to do is ask you, if you've got questions or comments that you need to make, but primarily questions, we're going to ask you to use the Q&A box, which you're probably all familiar with by now, at the bottom of your Zoom screen. But I'd ask you, first of all, to just let our panel take you through their slides first of all, just in case one of the questions that you've been thinking about or wondering about is already covered off by one of our speakers today, and that might-, that might well be the case. So, just bear with us, let the presentations go forward and then we'll pick up questions. What we're going to do is we've got a few set questions already, that have come in already, so I'm going to put that to the panel at the end of the first set of slides on exit reforms, on the £95,000 cap. Then, we're going to talk a little bit more after that about the MHCLG consultation on further reforms.
So, we'll do it in two separate parts this afternoon, but at the end, I'll take questions on-, on anything that's-, that's gone before in the webinar. So, there's plenty of time to ask and get clarification, and see what it is that you need to do. But just bear with us. Let's get through the presentations and then we'll be picking up your questions from the Q&A box. So, I think that that's covered everything so far. As I say, everything will go on the 'Events' page of the LGA website afterwards, so you don't need to ask me about me about the slides. I know that at least one of you will. No problem there. Okay. Without any further ado. We've only got an hour, so I'm trying to rush this introduction. And I will hand over now to my colleague, Naomi Cooke. Naomi.
Naomi Cooke: Good afternoon, everybody. As Sarah said, I'm Naomi Cooke, the head of workforce at the LGA, and I'm going to start off by setting out where we are with local government exit pay changes. The primary topic for today, as Sarah outlined, is the £95,000 cap. Once we've covered that and looked at some of the key questions it poses, we'll move onto the MHCLG consultation on further reforms. So, the £95,000 cap. To be clear, what we are outlining here today is based on what we know at the moment. Despite Treasury finally publishing the guidance direction and equalities impact assessment that accompany the cap regulations last week, there are still quite a few areas of uncertainty. Also, and we should say this at the outset, we are only covering local authority employers today. There are a lot of issues with related employers, where there's even less clarity, but we'll aim to pick that up on a separate webinar in due course as there's more than enough issues for councils to go through today. So, this webinar solely relates to local authorities as employers. To summarise how we got here, the £95,000 cap itself was initially proposed more than five years ago, yet the cap was finally signed into legislation this October and took effect on the 4th of November 2020. In itself, the legislation is pretty simple.
Aside from ill-health cases, no one in the public sector, and the definition of that is a little bit complicated, but no one in the public sector can receive an exit package of more than £95,000. This includes the amount of money an employer would pay into a pension fund when asked to fund unreduced early access to pension. This is known as 'the strain payment' and, in local government, it's been the major part of an exit payment for people aged over 55 for many years. Now, the MHCLG consultation, I'm only going to briefly mention this now as we'll cover it in more detail later. But for now, all you need to know is MHCLG, the Ministry for Local Government, launched a consultation in September to change the pension and compensation rules for local government. Their policies will amend the pension scheme rules to allow the £95,000 cap to apply. The absence of these amendments, with the £95,000 cap regs in place, is a problem we'll return to. However, the MHC-, the MHCLG proposals go beyond that and set out some further reforms that will further limit the amount of severance cash an individual can receive. These plans were issued by Treasury four-or-so years ago for the whole public sector to implement but, as yet, no other-, no other part of the public sector has successfully done so.
So, turning to employers in scope. This is the reason we were clear at the outset that this session is for local authorities only. The scope of these changes is unclear, and how the different rules apply to non-council employers can't be covered in one webinar. For example, some employers will be in-scope for the £95,000 cap and the MHCLG reforms, but others will only be in-scope for the MHCLG changes and not the £95,000 cap. Some could, theoretically at least, move in and out of scope of each. So, as you can see, it's a complicated picture. So, for today, we are only looking at local authorities, as they are clearly affected by both £95,000 cap legislation and further reforms that are proposed. And with that in mind, I'm going to hand over to Lorraine to take us through the changes.
Lorraine Bennett: Okay. Thanks, Naomi, and good afternoon everyone. I'm Lorraine Bennett, and I'm the senior pensions adviser here at the LGA, working on the local government pension scheme. Just to reiterate, this next section is just about the £95,000 cap. We're not covering the wider reforms being proposed by MHCLG until later in the session. So, the next few slides, I'm going to talk about the impact of the exit cap on redundancy and business-efficiency exits from the 4th of November. In this interim period, where there is a conflict between the LGPS-, LGPS regulations and the exit cap regulations, which we'll talk a bit more about later. And the considerations of this for local authority employers. We're then going to deal with some frequently asked questions after that, and then move onto the wider reforms after that. So, to start with, we're going to look at the position for-, position before the exit cap was introduced for employees who were made redundant and not entitled to the immediate payment of an LGPS pension. They won't be entitled to an immediate payment of the pension because they'll either be under the age of 55, or have opted out of the LGPS when we were made redundant and over the age of 55.
So, both the under-, under 55s and the employers over the age of 55 but not paying into the pension scheme, under the position before the 4th of November, would receive a statutory redundancy payment, which we're going to refer to as 'SRP' going forward, and potentially, a discretionary compensation payment of up to 104 weeks' pay. That will include-, that will be inclusive of the statutory redundancy payment. The discretionary payment is just that. So, whether it is paid depends on the employer's policy and the employer can choose to use the employee's actual pay in the calculation, rather than the statutory weekly limit, if the actual pay is higher. And the statutory weekly limit is currently £538 per week. For business-efficiency exits, the position is the same, except that a statutory redundancy pay-, payment is not payable, and that'll be the case for all the examples that we go through today. So, they will apply to business efficiency in the same way, but we'll just refer to 'redundancy', and just remember the statutory redundancy pay isn't payable in those circumstances. So, for employees who are under the age of 55 and in the LGPS, they will-, they would also receive a deferred benefit.
So, the benefits they've built up would stay in the pension fund and could be paid at any time between the age of 55 and 75. The pension will be reduced if it's taken before state pension age, or increased if it is taken after. So, the position from the 4th of November, now the exit cap has been introduced, is exactly the same, apart from the fact that the total is now capped at £95,000. So, the statutory redundancy pay and any discretionary compensation that the employer chooses to pay in line with their policy, there's a max-, maximum that can be paid of £95,000. So, in reality, because the discretionary compensation paid by local authorities is generally quite low, so the exit cap is not likely to impact on these cases very often. So, if we move to the position for LGPS members. So, employees paying into the LGPS scheme who are aged 55 when they are either made redundant or leave on efficiency grounds, the position for these people, before the 4th of November, was that they would receive a statutory redundancy payment, they may-, they could possibly receive a discretionary compensation payment in line with the employer's policy, and that could be up to 104 weeks' pay, with or without the weekly limit applied, they also had to take immediate payment of their LGPS pension and it would not be reduced for early payment.
The employer funds the-, would have fund the early payment of pension, and the LGPS administering authority would estimate how much that early retirement would cost by calculating a strain cost. And the strain cost calculation would be set locally by each administering authority, based on the local assumptions that they use, like expectancy in that area, etc. So, to recap, for exits before the 4th of November, they employee could-, must pay a statutory redundancy pay, could pay a discretionary compensation payment in line with their policy and the employee had to take immediate payment of an unreduced pension. So, the position for these-, from 4th of November for these people will depend on whether the total exit payments made to, or in respect of, the employee in the strain cost are-, will depend if the-, if that total cost is above £95,000. So, it's important to note that exit payments that count towards the exit payment cap include the pension strain cost. If the total value of the exit payments is below £95,000, then the member is not capped and there is no change in benefits for them. These exits can be processed as they were before the cap was introduced.
If the total of the exit payments is above £95,000, then this is where there's legal uncertainty for both the employer and the LGPS administering authority comes into play. Now, the (mw 11.59) has been created because the exit cap has been introduced before the LGPS regulations have been changed to accommodate it. And this is because the LGPS reg-, regulations currently state that the member must take payment of immediate payment of their pension without reduction, and it doesn't allow them to take a partially-reduced pension or to defer the pension. So, currently, the LGPS regulations still require that the member must take payment of an unreduced pension, but the exit cap regulations will prevent the employer from paying the full strain cost. So, what does this mean and what are an employer's responsibilities under the exit cap? So, the first thing to note is that this predicament will only arise for redundancy and business-efficiency exits where the employee is a member of the LGPS and is aged 55 or over. For these members, employers will need to add up all the exit payments they would normally pay, including the strain cost in that, and check if the total exceeds the cap.
If it does, the next step is to consider whether a discretionary or mandatory waiver is applicable. If it is, and the application for that waiver is approved, the exit cap is then waived and the £95,000 limit doesn't apply. I've made that sound quite simple. It really isn't. And Naomi's going to cover the waiver process shortly, so that's-, that's all I'm going to say about that for now. So, if a waiver isn't applicable or the application is denied, the next step is to consider whether any of the payments can be reduced to bring the total below £95,000. The new total will still need to include the statutory redundancy pay, because that has to be paid, the strain cost and any other payment that you're obliged to play-, to pay as an employer. So, the-, you'll be looking to reduce any payments that are discretionary, that you don't have to pay. If the new total, including the strain cost when you've tried to reduce these payments, is now below £95,000, the member is still entitled to an immediate payment of an unreduced pension and you would notify the LGPS administering authority of that accordingly. But if the new total is still above £95,000, then the employee is capped and the conflict between the LGPS regulations and the exit cap regulation comes into play.
The LGPS regulations say that the member must take immediate payment of an unreduced pension, don't forget, but the exit cap regulations prevent that the employer-, prevent the employer from paying the full strain cost. So, what should-, what should you do? Well, the first thing you need to do is to ensure that you keep your LGPS administering authority informed. It's important that you tell the administering authority of the member's status under the cap. That is, whether the employee is capped, whether the employee's uncapped or if a waiver has been applied for. This will ensure the administering authority can pay an unreduced pension when the cap isn't breached, and take the appropriate action when it is. Failure to check and inform could lead to a breach of the cap. So, if the member is capped, you will need to decide, as an employer, if you're going to pay what is called a 'cash alternative payment', and this is a requirement under the-, Regulation 8 of the Exit Cap Regulations. So, Regulation 8 provides that where an employer is prevented from making a pension strain payment because the pension scheme rules have not yet been changed, to allow for partially-reduced pensions, the employer must as an alternative pay the employee the equivalent amount up to the value of the cap.
So, because you're not able to fund the early retirement in full, you would make a cash alternative payment to the employee of the amount of the pension strain that you can pay. The employee will then receive either an immediate payment of fully-reduced pension benefits, or a deferred pension, which they could take at a later date. Now, this is the position of the government. They believe that the Exit Cap Regulations take precedence over the LGPS regulations, and that an employee's right to immediate payment of an unreduced pension falls away accordingly. However, the scheme advisory board to the LGPS has taken its own legal advice which states that there's a high risk of successful challenge if employees do not receive immediate payment of an unreduced pension, as this is provided for in the LGPS regulations, still, because they haven't been changed. So, it seems inevitable that employees are going to made a claim if they don't receive immediate payment of an unreduced pension, and that their chances of the claim being successful are high. The scheme advisory board's legal advice states that the claims are likely to-, to succeed because, under the LGPS regulations, the right to an immediate unreduced pension does not depend on the employer paying the strain cost to fund it.
There is no link between those two regulations. So, where does this leave us? Well, we recommend that you defer payment of the cash alternative until this conflict in the regulations is resolved, and it's likely to be resolved because of a legal-, outcome of legal challenge. But if you do decide to pay a cash alternative now, you need to be aware of the implications of doing so, and these are set out on the slide-, on the slide. Essentially, if employees end up-, essentially, these are that, if an employee ends up with a full pension, either because they make a claim and it's successful or the administering authority decides to continue to pay full pensions, you will be asked for a strain cost up to the cap to fund that pension. And if you've already paid a cash alternative, you'll be in the position of either having to try and recover the cash alternative payment from the employee, or end up paying twice. Once is the cash alternative, and once in increased scheme costs. You also need to consider that the cash alternative payment will attract income tax and employer's National Insurance where the total termination paid to the employee is above £30,000.
The employee might actually prefer to have that cash alternative pay to the pension scheme to buy extra pension, if they make a claim and it turns out their claim is unsuccessful. So, that's something else to consider. So, to summarise, where the cap is breached, there is a conflict between the LGPS reg-, regulations and the exit cap regulations, it is for each employer to decide what course of action you take in relation to the cash alternative. You may wish to take your own legal advice before doing so. But we recommend that you delay payment of a cash alternative until the-, situation regarding the pension is clear. This approach we believe will provide you with the most flexibility when the outcome is known, and it will present you with the least financial risk. The links to the legal advice and scheme advisory's commentary on that advice is all set out on their website, which is 'LGPSboard.org'. This week, we have published an information note for employers setting out a step by step process to follow, and you can-, you can access this on our administrator and employer website, which is 'LGPSregs.org'. And we will be publishing an information note for LGPS administering authorities, either today or early next week, setting out the considerations for administering authorities. I'm now going to pass back to Naomi, who's going to talk you through the process of waiving the cap. Thank you.
Naomi Cooke: Thanks, Lorraine. So, the next few slides relate to exemptions from the £95,000 cap, which can be through mandatory or discretionary waivers. Just to be clear, there are no exemptions for the further reforms proposed in the MHCLG consultation. But for £95,000 cap, we have two, mandatory and discretionary. Mandatory waivers cover cases where redundancy benefits are protected by TUPE and TUPE alone, and certain tribunal cases where the person deciding whether to allow the waiver is satisfied that a tribunal would pay an award. Originally, this was restricted to whistleblowing and discrimination cases but, following submissions to last year's consultation, will now also cover health and safety cases. So, pretty limited definitions for 'mandatory'. We'll come to discretionary in a moment. But the mandatory, despite being mandatory, there is a fairly detailed process that a council will need to complete in order to access a mandatory waiver. So, firstly, full council approval is required. That should be simple enough and, broadly, it's with-, within the authority's control. Secondly, though, approval is required from both the MHCLG Accounting Officer, that's the Permanent Secretary, and the relevant minister.
What recourse there is if they disagree with each other is unclear, although officials have been at pains to indicate that they will conduct the approval process concurrently. There's a range of requirements around how waiver cases should be recorded when used, and once you get into that position it's important to make sure the correct forms are filled in and the correct publicity is applied to waivers in usage. But councils should be aware that to secure a waiver in relation to a settlement process, so, the second criteria for a mandatory waiver, they will be expected to share their legal advice with the department. Now, for all of this, the situation in Wales is slightly different because decisions around the scope of the waiver and the waiver process itself rests more with Welsh ministers. So, that's the simple one. The mandatory waiver. Discretionary waivers have a further level of clearance built into the requirements. First though, when can you consider a discretionary waiver? Well, according to the direction and guidance from Treasury, a discretionary waiver can be sought in one of these three circumstances.
Now, the expectation and the indication from the guidance itself is that it will be extremely difficult to convince Treasury of the undue hardship exemption. But this is the first scenario when a discretionary waiver may apply. The second, workforce reform, is probably the one that will be of most use to councils. It isn't defined, but it could probably cover most occasions when a council might want to apply a waiver. However, councils' immediate focus might be the first one, which is supposed to be the equivalent of a transitional provision. However, the restriction is so tight, particularly given the tardiness of the guidance publication, that it's hard to see how the many councils with active redundancy exercises will be able to access it. In summary, the waiver is potentially available where an exit happens that should have taken place before the 4th of November, but was delayed for reasons outside the individual's control. So, an example might be where someone should have left before the 4th of November but was asked to stay on to say-, to see through the COVID the response, for example. So, it's pretty restrictive criteria for that. It's not really a transitional protection for exits that are going through the process now.
So, if there is a basis for a discretionary waiver, the guidance sets out the rather bureaucratic approach to actually securing a waiver, and that's what's set out on this slide. So, again, full council approval. Again, the minister and top civil servant in MHCLG. And for discretionary waivers, Treasury itself. Now, Treasury suggests that their turnaround on decisions could be four weeks. MHCLG haven't made any similar commitment, although potentially, when they finally publish their guidance to councils, they may indicate some likely timescales. We certainly urge them to do so. So, without Whitehall sign-off by three individuals, councils cannot agree severance arrangements that exceed £95,000. Aside from the limited circumstances outlined for mandatory exemption. What one of the several things we don't know at the moment is what, if any, feedback will be forthcoming from the central government part of this process. So, there is a risk that there could be an element of ping-pong in actually getting a waiver through. But before we get too concerned about that process, however, there's the more immediate concern relating purely to the timing of this legislation. And the problem we've alluded to is set out on this slide and, as you will-, would have expected, we've raised this repeatedly with MHCLG and Treasury.
MHCLG have said there will be guidance for councils to cover this point, but although the cap regulations are now in place, that guidance has not been published. And if anything, the letter sent by the minister to admin authorities and chief exec's recently has confused things a little more. Aside from that, there is currently no mechanism for local authorities to get a discretionary waiver through MHCLG. Treasury published a pro forma at the back of the guidance, which outlines what information they will require for a discretionary waiver and, logically, MHCLG will do the same, but so far they haven't produced it. So, the best we can do in the absence of any guidance is to say, if full council have approved and a discretionary waiver is deemed urgent, a council might consider using the Treasury form as a basis and sending their applications to the MHCLG Minister, Luke Hall, and the Permanent Secretary, Melanie Dawes. So, notwithstanding views on the cap itself, the LGA has flagged many concerns on how it is to operate. We continued to seek clarity from the government, but all we can say is when we receive it, we will pass it on to councils. So, I hope that's been a useful overview for you, even though there isn't as much certainty as we would've liked, but I think you can probably see why that's the case. So, we're going to explore a few more points in detail just now. So, with that, I'll hand back to Sarah for the next section of the webinar.
Sarah Ward: Thank you very much, Naomi, and I hope that that's been helpful so far, everybody, just to take you through. A bit of a reminder, there, of what we told you last time, a bit of information about how everything works, what we know, where we're up to. So, what we're going to do now is put a few questions to-, specifically to Jeff Houston and to Phil Bundy, who I'm hoping have joined you now, on the screen in front of you. You've been very disciplined, as an audience, so I'm really impressed with you. Thank you for not flooding us with questions too early. And you did wait 'til the slides were going, so you are-, you're a brilliant audience and I'm very grateful for that. But what we will do, though, is just go through those later on, at the end, because we've got some more slides to take you through. So, bear with us. But some of the frequently asked questions that have already come into us, I'm going to put that to this pair of experts right now. So, let's go through some of those. So, the first question is, Phil-, for Phil. Do employers' NIC payments count towards the cap? What can you tell us about that, Phil?
Phil Bundy: Yes, sure. Well, we've actually asked Treasury to confirm the position on this, and the reason for this is that, you know, it's a fair amount of money we're talking about here. It's 13.8%, I think it is, on exit payments above £30,000. But if you look at the regulations themselves, and I think, probably, they do fall within the category of an exit payment for the purpose of a cap. That's because exit payments are defined not just as a payment you make to the employee, but also that a payment that you've made to another person on behalf of that employee in compensation of loss of their employment. Not in compensation, in connection with the loss of their employment. So, if you as the local authority are have paid money to the tax man when someone leaves, then that falls into the category of an exit payment. But when you think about it, really, it doesn't feel right that it should count towards the £95,000 cap. Couple of reasons for that. Employer NICs were only recently introduced this year, and that was, you know, well after they were first talking about the £95,000 cap. But I think the crucial thing is this is a payment from a public body to another public body, the tax man. So, it's staying within the public purse. So, that's why we've asked Treasury to confirm the position on where we are on this. We've been asking them this throughout the consultations, since we've known that employer NICs were coming into force, but they're still yet to confirm the position for us.
Sarah Ward: Okay. Thank you very much for that really full answer. Thank you, Phil. Right, the second question on my list, colleagues, is for Jeff. Jeff, we've already given someone an exit quote, including pension, which is for more than £95,000. What should we do?
Jeff Houston: Thanks, Sarah. Well, I think, first of all, you need to see how far down that particular process you are. Is it just that you've had a conversation with the employee about potentially taking voluntary redundancy, or have you gone all the way to getting an agreement to them and you've both agreed a termination date? So, you need to see where you are in that process. If you're not all the way through the process, is there a conversation to be had with the individual about whether they would still want to go if this cap situation applies to them? Also, have a think about whether you could delay. I mean, maybe-, maybe you could actually delay that termination date to next year and, hopefully, by then, the MHCLG reg's might be in place and things might be a bit clearer. So, have a conversation to see if that can be delayed. But you will have situation where-, where that isn't possible. Where you have got somebody where, currently, they're over the £95,000 cap, termination date has been agreed. What do we do? Well, I think the first thing you need to do is before-, even-, you know, you've had a look at it and you think it's over £95,000. Go back to your administering authority and just check that strain cost.
'Cause I am aware that some administering authorities are looking to see whether they need to review their strain costs and how their calculation's been done. So, just make sure that the strain costs that you're going to check against the £95,000 cap is the final strain cost that it's going to be asked for from your administering authority. So, make sure that's there. And then, if you're still above £95,000, have a think about the waiver. I mean, Naomi's just taken us through that waiver process and it's not easy, and it's not simple and there is very strict rules about what can be waived and what can't be waived. But have a look at it, see if any of those-, those waivers potentially apply in that case. And it's only when you've been through all of that process, you're going to find yourself in a situation where you've got an employee who's capped, they're not going to be able to get all of their pension, 'what do I do then?' Well, the first thing you need to do is go and look at the step by step information document that's on the LGPS reg's website. That will take you through, step by step, what you need to do as an employer. This is a very complicated thing. You've got individuals who are going through a potentially awful part of their life, being made redundant.
So, take it slowly, take that step by step approach. You'll then be in the situation of saying, 'Okay, the person is capped. Do-, do I pay this cash alternative thing that everyone keeps talking about, and what the government wants to pay?' Now, it might look fairly straightforward. Government said pay a cash alternative. So, why would I even think about not doing that? Why would I think about deferring that? Now, it's been touched on by Lorraine, but I think it's just worth going through those again, just-, just to clarify what we're talking about here. So, let's say the person has got a combination of statutory redundancy and compensation of £25,000 that you have to pay them. So, you've got £70,000 left that you would-, that you could, according to government, pay to the individual as a cash alternative. So, first of all, you've got to remember it wouldn't be £70,000 'cause they're going to pay tax on it. And it won't be £70,000 because you're going to pay employers' National Insurance on it, which may have to be included in the cap, which is going to bring that number down again. So, it's not going to be £70,000 that you're going to be paying to the individual. But for you as an employer, the most important thing to think about is, 'If I pay this to the individual, will I end up being asked, still being asked, for a strain cost from my administering authority? And if the strain-, if the strain cost is requested and I've already paid the cash alternative, can I pay the strain cost?'
Probably no. But even if you can pay the strain cost, because in-, in some way you've got an agreement with the individual to-, for them to hand it back if they end up with a full pension, that's going to be difficult anyway. And if you can't get it back and you can't pay it, that will be paid for from somewhere. This is a funded scheme, that money will have to be found from somewhere and it will be found from employers. So, there is a danger, if you pay the cash alternative, the member ends up with the full-, full pension, because either that's what the administering authority has decided to do after looking at all the legal advice or the member has claimed and won, you could end up paying for this twice.
Sarah Ward: Goodness. Absolutely. Thank you very much for that, Jeff. It-, it is a complicated subject and I think we're all finding our way through it. But we'll-, we'll keep working these things through as we go. Let's ask another question, and I can see the-, the red box is-, is starting to grow from traffic. So, we'll have a look at that when we go through the next set of slides and pick out anything. But there are one or two things that I think may have been-, that have been asked that I think Jeff might have just answered. So, we'll-, I'll have a look through as we go forward. In any case, let's move on. The next question is about Judicial Reviews and, Phil, we wanted to get your take on this. Various reports are out there, that the cap is being Judicially Reviewed.
Phil Bundy: Yeah.
Sarah Ward: Can you talk us through that? What's happening?
Phil Bundy: Yeah, there's some-, there's several Judicial Reviews in the pipeline at the moment. There's the British Medical Association one, the BMA one. But more relevant for our sector, you've got Unison looking at Judicial Review. GMB, Unite, lawyers in local government, along with Alice and Solace as well. So, they're all raising various issues with the exit payment cap. You know, saying it's irrational in some respects, it doesn't match up with the guidance, that type of stuff. Human rights arguments about, you know, right to property, right to accrued rights, and all that type of stuff. And where we are at them is, you know, there-, there has been some initial correspondence on them. We've not actually had proceedings issued on it, but once proceedings are issued, we could see action on this pretty quickly because Judicial Reviews tend to go through the system quite quickly. And there is potential talk, even, of a hearing in December. But you know, we don't know how quickly the courts will be able to deal with it, though, bearing in mind COVID and the situation there. So, I suppose what I'm saying is just keep an eye out on it, because if there is a successful challenge, then we may find some of the exit cap regulations, you know, quashed or, you know, put-, put-, put away for a while. And I'd have to come back and revisit the situation.
Sarah Ward: Okay. So, it's really a case of watching this space.
Phil Bundy: Yeah. Yeah.
Sarah Ward: Thank you very much. I have another question here for Jeff. 'Jeff, my pensions admin authority won't give us strain cost quotes. The departures for next year. What can we do about that?'
Jeff Houston: Yeah. This comes down to the fact that, along with the further reform, the-, that Lorraine's going to talk about in a minute, when those MHCLG reg's come in, they bring in what's called a 'standardised strain cost calculation'. So, currently, the strain costs are calculated each fund-, by each fund. Actually using their own set of factors. They'll be based on things like the perceived longevity within that fund. You know, to try and calculate how-, how much it costs. Next year, there will be standard strain costs, so everyone will calculate strain costs in the same way. In lots of ways, it's going to be much more simple and we will know upfront how strain costs are calculated, to the extent that employers might even be able to calculate them themselves. But we don't know when those strain costs, those standard strain costs, are actually coming in because we don't know when the MHCLG reg's will be made. I mean, we've got a consultation now on the reg's themselves until the 18th of December, then those reg's will-, all of those-, those consultation responses will have to be read, and there will be lots of them, and then the actual reg's themselves will have to be published and come into force.
So, it's probably going to be January/February next year before we see those regulations. And those standard strain cost calculations come in on a mandatory basis. That means it's very unclear for administering authorities. On what basis should they be quoting strain costs for next February, March or April? Because they actually don't know. Is it going to be standard, or is it going to be local? I've been having conversations with-, with administering authorities and with fund actuaries, and I do know that they are having conversations about, for example, 'Shall we bring in those standard strain costs anyway? Shall we anticipate those?' It's one of the reasons why I said, if you've got one-, if you've got exiting in train at the moment, go and check with your administering authority to see if they're going to change the strain costs. If we get to a situation where they've all said, 'Let's anticipate,' then, yeah, they can all go back to calculating strain costs, getting you quotes. But if you're desperate for a quote, please go back to your administering authority, please ask for one, even if it's on the current basis, because it will at least give you some idea as to whether you're looking at a capped member, or whether you're looking at an uncapped member.
Sarah Ward: Okay. Thank you for that, Jeff. Stay right where you are. The next question is for you. And I can see in my eyeline a very similar question that's come through from the-, from the Q&A, as well. So, you said that the waiver power in Wales is with Welsh ministers. Do you know if they will have the same grounds for a waiver in England? For example, TUPE and discrimination claims? And I-, I think the question from the audience was just to know whether-, whether you-, you were aware of the latest developments there. So, if you can just talk us through-
Jeff Houston: Yeah. We, we understand that the Welsh government is looking at this in great detail, that they've made some comments about what they-, what the approach that they-, they intend to take. We anticipate from what's been said, and from a letter that's been circulated from Welsh government, that we may well see a different approach, shall we say, to waivers in Wales than we see in England. And it may well be that in Wales we may see more waivers than we see in England. The under-, the-, our understanding is Welsh government will take a more flexible approach and a more flexible view to how waivers are-, that waiver process works and on what grounds those waivers might be. We're waiting for final confirmation on that. We understand the Welsh government is going to give out some more information as to what they're going to include and what they're not going to include, but for example, we're going to-, we understand that their attitude towards strain cost may be different than the attitude in England.
Sarah Ward: Okay, interesting. Thank you very much, Jeff. Final question in this little section. And as I said earlier, colleagues, I can see the Q&A box filling up. What I'm going to do, because we have got some more slides on the the further consultation to take you through, I'm just going to ask one of my colleagues to go into the Q&A and just copy the questions in there so that we can put that onto a Word document so we don't lose it when the webinar closes. And that means we can work through those questions and make sure we're providing you with all of the answers and information and FAQs after the event, if-, if we do run out of time. Which we may be alright, but let's-, let's just cover ourselves in case we don't. Phil, one of your specialist topics next. TUPE. I know you love to talk about TUPE. He really does. I'm not being sarcastic. How will the TUPE waiver work?
Phil Bundy: Right. Well, you've got the waiver applied when someone's got a right that's protected under TUPE, and it's actually protected under the TUPE Regulations or under the Acquired Rights Directive. So, that's the European law that's sort of underpins TUPE. So, the first thing you need to do is you need to check whether, actually, someone's TUPE'd in under the TUPE reg's. Most people would, if you're talking about a typical in-sourcing sort of situation. But if you've got what we-, you know, sort of wider local government reorganisation, and I'm talking here about, sort of, districts, counties, sort of being merged into a unitary and becoming, in effect, a new local authority, then that technically does not fall into the category of a TUPE transfer. It's known as the 'Henke exemption'. It's named after a European case. So, in that situation, people transfer under specific legislation, you know, and it wouldn't be a TUPE transfer regulations transfer. So, the waiver wouldn't apply in that case. But the last point, as well, though, is to think about, well, actually, even if someone's transferred in under the TUPE reg's, is it a right that's protected under those reg's? Is it a contractual redundancy payment that you are obliged to honour, because if you try to change it you wouldn't be able to do it, that change would be void under the TUPE reg's? So, potentially, you know, it really is quite a narrow waiver. We'll have to see, though, how it all-, all pins out-, all works out. What the attitude of MHCLG is is to-, when we're going through the waiver process.
Sarah Ward: Okay, thank you for that. I think we now know what Naomi meant when she said, 'That's the simple one.' It's all-, all a matter of comparison, isn't it, on this one. Thank you both for that, very, very much indeed. We are-, I'm going to ask you to not go too far away from your computers because we'll probably come back and do some more Q&A's at the end. But now, I'm going to hand back to Lorraine to take us through the MHCLG consultation on the further reforms. So, Lorraine, back to you.
Lorraine Bennett: Sorry, I was just removing the spotlight from Jeff, there. Thank you. Thanks, Sarah. Okay. So, now, I'm going to talk a little bit about the MHCLG consultation, which has already been referred to, on reforming local government exit pay. The consultation was published in September, and the proposals amend the pension scheme and the compensation rules to allow for the £95,000 cap to apply. And they also introduce wider reforms to local government exit pay. So, when the regulations are enacted, the conflict in the two sets of regulations, in exit cap regulations and LGPS regulations, will fall away. That conflict that we talked about earlier. And they do this by allowing for partially-reduced pensions and giving the member the choice of having their pension paid if they're made redundant over the age of 55. As the current regulations currently provide that these people must take payment of their pensions. But the proposals go further than this. Because they also limit the amount of discretionary compensation local authorities will be able to pay, and they provide that the amount available for any strain cost will be reduced by the statutory redundancy pay. The consultation closes next Monday.
So, if you've haven't responded yet, there is still time. The deadline for providing feedback on the draft regulations that accompany the consultation is not until December the 18th. And as Jeff has already said, we don't expect the legislation to take effect until early next year. January/February at the earliest. So, just to be clear, these proposals don't-, don't impact on exits that are happening now. They will only impact after the regulations are made, which as we've already said is likely to be next year. In addition, the draft regulations that accompany the consultation provide transitional measures for exits that are agreed before the regulations come into effect, where the exit was within six months of that date. So, the impact for some exits could be even a little bit further down the line. Having said all of this, you will need to be aware of these proposals because they will impact on your workforce planning for next year. So, if we turn to the proposals themselves, we've already covered some-, some of this information at the beginning of the-, of the session. But we're now going to introduce what happens when the proposals in the MHCLG consultation are added into the mix.
So, we're going to start with employees who are not entitled to an immediate payment of their pension because they're either under the age of 55, or over age 55 and not in the scheme. The position before the 4th of November, which we've already covered, is that they would be entitled to a statutory redundancy pay, potentially a discretionary compensation pay of up to 104 weeks, if that was in line with the employers policy, and they-, if the person was under 55 and in the pension scheme, they'd have that deferred pension that they could take any time between the age of 55 and 75, with the appropriate reduction or increase. The exit cap regulations. So, we've already covered this, as well. They cap the total that could be paid of the statutory redundancy and discretionary compensation at £95,000. So, it couldn't be above that. The proposed position, when the MHCLG further reform changes are brought into effect, is that that discretionary compensation will no longer be limited to 104 weeks. It will be limited to what is showing on the slide at the moment, which is a maximum of three weeks' pay per year of service or a ceiling of fifteen months, whichever is the lower.
The calculation of the discretionary compensation must be based on a maximum of £80,000 salary-, £80,000 salary, and the total of that, then, still cannot see-, cannot exceed the £95,000 cap, £95,000. Again, those employees who are in the LGPS will also receive the deferred benefit, which can be paid at any time between the age of 55 and 75, with the appropriate reduction or increase. So, this is the position once the changes to the LGPS regulations have been made, which will happen at some point next year. So, moving onto employees who were in the LGPS and over the age of 55 when they were made redundant. The position before the 4th of November was that, again, we've covered this earlier, was that they would be able to receive a statutory redundancy payment, a discretionary compensation payment, if that was in line with the employer policy, and they would have to take immediate payment of the LGPS pension, unreduced. And that would be unreduced. And the employer had to pay-, sorry, the employer would fund the early payment of pension, and the-, and the LGPS administering authority would calculate how much that would cost on a local basis, and that would be the strain cost.
So, the position under the-, so, moving onto the position under-, under the exit cap at the moment. We've already covered this in the previous section. We haven't detailed it here because, as we discussed earlier, it depends on whether the cap is breached or not and there is that conflict in regulations. So, we're just moving straight onto when-, when the MHCLG further reforms are introduced. The proposed position is, for these members, that the total cost of their exit will have to be limited to the greater of the strain cost, and that will be inclusive of statutory redundancy pay, and subject to a maximum of £95,000, or a discretionary compensation payment calculated with reference to the new limits that we mentioned on the previous slide, and the salary-, maximum annual salary of £80,000. So, in almost all cases, the strained cost is going to be larger than the discretionary compensation payment, so employees will have to choose whether to receive either a discretionary compensation payment or have their strain cost paid up to £95,000.
In the rare cases where the discretionary compensation payment is bigger than the strain cost, the employer will be able to pay the strain cost and make a cash payment equal to the difference between the strain cost and the discretionary compensation payment. One thing to point out here, which I think-, it's-, people have-, it's been hard for people to understand because it-, it-, it was unexpected, is that the strain cost is always reduced by the statutory redundancy pay, irrespective of how much the strain cost is. So, unless the employee elects to give up their strain-, their statutory redundancy pay and use it towards the cost of the strain, they will always have an actuarily-reduced pension. And that is even if the strain cost is less than £95,000. Even if the strain cost is £30,000. Any amount. Another point to note is that the strain cost will be calculated, as Jeff has already mentioned in one of the questions, it will be calculated on the standard basis across all LGPS funds in England and Wales. And this means it's unlikely to be the true cost, as it won't be based on that local experience, but of course it will be picked up in valuation process and that could have an impact on employer contributions.
Now, the next few slides go through all the different options for employees who are members of the LGPS and who are made redundant over the age of 55. In the interests of time, I'm not going to go through each of these options. Partly because this webinar today is mostly about the exit cap and, also, because these changes aren't effective yet. We will provide a copy of the slides, so you'll have a copy of the information, and we did run through these examples in the last webinar that we did on the 23rd of September. And they were exactly the same examples. So, if you want to have-, if you want to watch us talking through these examples, then that webinar is available online and we will send a link around to you all. But I just want to highlight the main-, the main points of the changes, some of them which I've already-, I've already made. But going forward, the employee will have a choice as to whether they will take their pension. They will no longer be required to take it, and that's people who are made redundant or retire on business-efficiency grounds over the age of 55. If a strain cost is paid, the employee will not longer be entitled to any discretionary compensation pay, except in those rare cases where the discretionary compensation is bigger than the strain cost.
The total cost of an exit cannot exceed the strain cost. So, strain cost is always reduced is always reduced by the statutory redundancy pay, irrespective of how much the strain cost is. So, unless the employee elected to give up their statutory redundancy pay and use it towards the cost of the strain, they will always have a reduced pension. That is even if the strain cost is less than £95,000. And where the £95,000 cap applies, employees will have the option of using their own funds to buy out some or all of the reductions. So, just to finish off, some of the concerns that we have about the further reforms are that there are no-, there's no option for waiving further reform, as there is for the cap. For example, on hardship grounds. Reducing the strain cost by statutory redundancy pay is complex and it will affect the low and part-time employees disproportionately. We are submitting our response to this consultation on Monday and we will be providing some examples of this in our response to that consultation. This going to be difficult to explain to employees, most of whom already find pensions difficult to understand. And of course, where employees want to use their own funds to buy out some or all of the early reduction, there's going to be the need for that much closer-, closer liaison between the employer and the pension fund. The pension software firms have already confirmed that they're not going to be able to programme these changes in time for the change-, for the regulations coming into effect, so some of the calculations are going to have to be done manually until the updates are made. And on that note, I'm going to pass back to Sarah for questions. Thank you.
Sarah Ward: Thank you very much, Lorraine. I've got a bit of a reputation here, now, at the LGA, for hosting these webinars. They're always on time. Today is going to break me. We're going to do this really fast. So, I've tried to pick out some questions. As I said earlier, we're copying them out. Phil, I'm going to give you three questions in one go. This is all very poor hosting, but I want to try and get stuff out there. We're going to have to be really quick and see if we can just get a few. And just to give early notice, Naomi, I'm going to come back to you on the waivers, Jeff, I'm going to come to you on flexible retirement. Phil, first of all, though, I want you to pick up three things. First of all, whether or not we need to amending discretionary compensation policies. The second question I want you to pick up is about Employment Tribunal awards, if you can comment on that. And the third thing, I've closed the chat box, but it's about NDA's. If you can comment on settlement agreements or-, it's about-, about cash lump sums and NDA's. If you don't mind jut trying to cover those three things as fast as you can. Sorry.
Phil Bundy: No, it's fine. The-, the first issue is whether you should be looking now at amending your discretionary compensation policies, your redundancy policies. On the face of it, you should, you know, potentially be looking at them to say, 'Right, okay, we need to amend it to say that we won't make payments in excess of the £95,000 cap.' But remember, we’ve got the MHCLG reforms coming along and, you know, amending these policies is going to create some industrial relations unrest, potentially. You might feel that it's worth waiting until the MHCLG reforms and you do it all then, in one hit. Whatever you do, though, when you are looking at amending your policies, you'll need to make sure you follow the proper process and also get legal advice, and consider any equalities considerations as well. I think the second question was around Employment Tribunal awards. Are they covered by the cap? No, they're not. They're not classed as exit payments. Neither are court payments. So, a Tribunal awards £110,000 compensation, that's absolutely fine. If you've paid £110,000 under a settlement agreement, or you were proposing to do that for, say, a discrimination claim, then that is subject to the mandatory waiver process.
You would have to go through that waiver process. And the last question was about the use of, I think, when you talked about NDA's, I think you were talk-, means settlement agreements. I think the thing with settlement agreements is that the issue here is that that's normally between the employee and the employer. You've got the complicating fact-, factor here, that you've got the pensions administrator involved, as well. And they're the ones that pay out the pension. So, if you're going to look at trying to wrap this up in any sort of settlement agreement, you'd need to work out how you're going to protect the pensions administrator as well. And I'm afraid that's not something I can answer now. But that's something that people would need to look at.
Sarah Ward: Brilliant. Thank you, Phil. And thank you for being quick, there. Naomi, I was going to come to you to ask if you could pick up. There's a few questions about discretionary waivers and, also, there's a question about what might set a precedent. What might constitute a precedent. If you can just give your thoughts on those issues, please.
Naomi Cooke: Yes, sure. There's not a lot of information in the Treasury guidance. The Treasury guidance on workforce-, workplace reforms also includes the word 'urgent', which isn't in the rest of the direction and so-forth. So, there isn't-, there aren't any examples given. Same for precedent, as well. It just appears in the pro forma. It's not described or set out in detail anywhere else. It is feasible the MHCLG guidance might shine some more light on this, but we'll have to wait and see because that guidance isn't available yet. It's clear from the way the Treasury worded their guidance that they see these as exceptional. they don't see this as part of a routine process, that, you know, one of the things you do when you're doing exit-, exits is get waivers. They are at pains to point out that this should be exceptional. How that emerges in terms of which cases are accepted or not, we'll have to wait and see. But aside from what the guidance that HMT have published, there is pretty limited, in terms of examples and so-forth. It's going to be a lot of try out and test, and see what works and see what gets through. as that process develops, obviously, as the LGA will try and feed back to you, so-, so that information is shared. And just one point I'd like to make, while we;re talking about waivers. As I said, to get a discretionary waiver through at the moment without any guidance from MHCLG, you might want to write to the Permanent Secretary at MHCLG, who of course is Jeremy Pocklington. And anyone who thought I said Melanie Dawes earlier was clearly wrong. It's definitely Jeremy Pocklington. So, just to clarify anyone who may have misheard.
Sarah Ward: Absolutely. And always good to test, Naomi, that the audience are indeed listening and paying attention. So, absolutely, it was a good trick that you played on them, there. So, Jeff, we're going to ask you to pick up the question-
Jeff Houston: Yeah.
Sarah Ward: About flexible retirement.
Jeff Houston: Flexible retirement.
Sarah Ward: Does it only apply? You're on it already. Lovely.
Jeff Houston: Yes, yes, yes. Thanks for only leaving me about one-and-a-half minutes, Naomi. Flexible retirement, very quickly. Flexible retirements, in principle, are not caught by the cap if they're not an exit. So, when you do your flexible retirements, make sure you do them by change of contract, not via and exit and re-employment. If you do them via exit and re-employment, they will be caught because they're an exit. I've also been asked a question about what happens to somebody who gets-, gets a flexible retirement, gets a full pension and then happens to get made redundant. Now, technically, they are two separate things and the cap will only apply to the redundancy. But be careful. Treasury are on the lookout for things like this. It will happen accidentally, it will happen just in the course of things, but please, please, please, don't be thinking about engineering things like this. Treasury will be on the lookout for it and they will change that exemption for flexible retirement if it's being seen to be misused.
Sarah Ward: That is very good advice, indeed. Thank you very much, Jeff. So, colleagues, I'm going to wind it up there. Thank you so much for joining us this afternoon. I'm sorry we had to go at such pace in the end, but as you'll appreciate, such a big, complicated issue. And there's so much information to share and to keep clarifying. We will make sure that we've captured everything in the Q&A, so we will go through that. I don't think it's something that we'll-, we'll publish. I think that's one of the questions that's in there. But what we'll do is pick out things and make sure that our web pages contain as much useful and helpful information as possible, as we always do. Lorraine gave you the LGPS information earlier on, but also, the ERU pages within the 'Workforce' part of the website, also has an exits and MHCLG reform info in there, too. So, don't forget to look there. This has been recorded, which, you know-, so, it will be available. I'm sure you'll want to watch it back on many occasions. But also, all of the slides will go up into the 'Events' page of the LGA 'Events' section of the-, of the website. So, that's there. There are other events all the time, too, including, we have continued to promise-, to say that we will pick up specific issues about how other, non-council, local government family employers are affected.
I know there was a couple of questions about schools and teachers, all the rest of it. And we will-, we will come back to that. Police, staff, council, we have talked about that too. So, we will do all of those things. I think that's probably it. Out of time for us. But just to say, thank you very much to our panel. I can see them all. I will get them to tidy up their bookshelves before the next one. But Lorraine Bennett, Jeff Houston, Naomi Cooke and Phil Bundy, thank you all for joining us and we hope to see you again really soon. Thanks very much. I've been Sarah Ward and we'll see you soon. Bye, now.