Restriction on Public Sector Exit Payments revoked (for now)

In our article back in October 2020, we discussed how the long foretold, but hastily implemented, Government plans to introduce a £95,000 cap on the total pre-tax aggregate value of public sector exit payments were coming into force on 4 November 2020 with very little notice, only 21 days.

What’s happened now?

After only four months, on 12 February 2021, HM Treasury announced that after an extensive review of the application of the cap, the Government has concluded that the cap may have had unintended consequences and the Restriction of Public Sector Exit Payments Regulations 2020 are being revoked.

A Mandatory HM Treasury Direction, in force from 12 February, disapplies the cap until the Regulations are formally revoked. The Government has also published guidance stating that any employee who was affected by the cap while it was in force should request the amount he or she would have received had the cap not been in place by contacting his or her former employer directly. Employers are encouraged to pay to any former employees to whom the cap was applied the additional sums that would have been paid but for the cap.

The vast majority of public sector authorities and offices were caught by the Restriction of Public Sector Exit Payments Regulations 2020. The £95,000 cap applied to any non-exempt termination payments that represent a cost to the employer. This includes:

• redundancy payments;
• employer pension contributions, including any top up payments to fund a pension enhancement;
• ex gratia sums;
• voluntary exit payments;
• a payment in lieu of notice that exceeds one quarter of the employee’s annual salary; and
• shares and share options.

Where two or more public sector exits occur in respect of the same person within a period of 28 consecutive days, the total amount of the exit payments made to that person cannot exceed the £95,000 cap.

The Regulations had significant pension implications with the early implementation date disappointing those who hoped the implementation would be delayed until at least after the outcome of the Ministry of Housing, Communities and Local Government consultation on the impact of the proposed reforms. It is likely that the unintended consequences are largely pensions related.

End of the cap for good?

While the 2020 Regulations introducing the cap are being revoked and now not being applied, the new guidance does state that “HM Treasury will bring forward proposals at pace to tackle unjustified exit payments”,  so public sector employers need to watch this space.

If you have any queries about the information in this insight, or about employment issues more generally, please contact Connie Cliff or Jane Fielding in our Employment team.