LGPS could face legal challenges over new exit payment cap

The Treasury announced its plans to limits exit payments to public sector employees in 2015, and published its response to the related consultation in July of this year. 

It was originally expected that the move would be timed to coincide with the conclusion of a separate consultation by the Ministry of Housing, Communities and Local Government, which is responsible for setting LGPS regulations.

We could be in a position where administering authorities are effectively going to have to ignore what the LGPS regulations themselves say

Alison Murray, Aon

However, the MHCLG consultation is still ongoing, and the Treasury’s own regulatory change came into force today.

Under the Treasury regulations, exit payments, which include redundancy payments and other discretionary compensation payments, will be capped at £95,000.

However, conflict with the unamended LGPS regulations occurs because the exit payments capped by the Treasury include strain costs, which are incurred when a member is allowed to retire early on grounds of efficiency, redundancy, or otherwise with the consent of the employer.

As it stands, while the Treasury regulations would seem to afford affected members an immediate but reduced pension should they be made redundant, under existing LGPS regulations those members are entitled to an immediate unreduced pension.

Incompatible regulations

Aon partner Alison Murray told Pensions Expert: “The crux of this is, how do those two pieces of legislation interact? Because they’re clearly incompatible on the face of it. And the government’s view is that these new Treasury regulations that are coming into force effectively override existing legislation.”

The minister of state for regional growth and local government, Luke Hall, wrote to LGPS-administrating authorities late last month and affirmed this view. 

While acknowledging the MHCLG was still consulting on its own rule changes, Mr Hall wrote: “In the meantime, the recommended course of action for an administering authority to act consistently with its legal duties is that the provisions of [LGPS regulations] are subject to the cap.” 

He added: “The government’s view is that LGPS members in that position should be able to elect to receive an immediate but fully reduced pension or, if they do not so elect, a deferred pension plus a lump sum equal to the capped strain cost.”

This evinces a legal principle known as implied repeal whereby, should a law or piece of regulation contradict an earlier law or piece of regulation, the later one takes precedence and the older one is deemed inoperable.

However, James Goudie QC, who was approached by the LGPS Advisory Board to give legal counsel, cast doubt on whether the requirements for implied repeal had been met.

Writing in his legal opinion for the LGPS Advisory Board, Mr Goudie said: “In order for there to be any question of implied repeal... there must be a clear inconsistency. Here it can be said that there is an incompatibility. But a lack of compatibility is not necessarily an inconsistency, still less the clear inconsistency that the law requires for any implied repeal.”

Per an update on the issue by the LGPS Advisory Board, the uncertainty leaves LGPS-administering authorities in a particularly awkward position as they could end up fielding a challenge no matter how they proceed. 

If they go by the Treasury regulations, they face a “high risk of a successful challenge”, according to the advice given to the board by Mr Goudie. However, if the authorities go by existing LGPS regulations, “they will not be acting in accordance with the government’s view and may also be subject to a challenge on the grounds of repeal”, the board’s update stated.

The board added that, although Mr Goudie’s opinion is that grounds for implied repeal have not been established, that advice “does not remove the risk of a challenge, which if successfully brought could result in the LGPS-administering authority being found to have acted ultra vires and having to seek to reclaim the pension”.

“We could be in a position where administering authorities are effectively going to have to ignore what the LGPS regulations themselves say — they may be subject to challenge from employers and from members. Public sector employers are in a position where they’re not 100 per cent sure what exactly they need to do and what exactly their members will be entitled to,” Ms Murray explained. 

The uncertainty would have a knock-on effect on employers looking to undertake workplace reforms, she added. 

Local authorities generally “rely on voluntary redundancies, so people putting themselves forward to be part of a severance exercise”, she said. “And you would have thought that in making such a decision members would be wanting to know what the pension position is.

“If there’s uncertainty over that, does that then mean that those members don’t put themselves forward, making it much more difficult for employers to reform effectively?”

An unprecedented situation

Eversheds Sutherland partner Gary Delderfield told Pensions Expert that “it’s difficult to think of a precedent where this kind of conflict in legislation has happened”.

He explained that one of the reasons the government’s claim of implied repeal may not be sufficient is that “we’ve effectively got two sets of quite clear regulations, and the government had the opportunity to change the LGPS regulations if they wanted to, and haven’t done so.”

He noted that the MHCLG consultation does not close until November 9, and “I understand they’ve received quite a lot of responses already, and will get quite a few more” by then.

“Those regulations are going to have to go through a process, so we may not get the amendments to the [LGPS regulations] until early next year,” Mr Delderfield said.

“I can’t see it happening before December at the earliest, but it’s probably likely to stretch into the new year. So you’re going to have several months where the pension funds are effectively caught in the middle.”

Kirsty Bartlett, partner at Squire Patton Boggs, concurred on the likely timeframe, adding that “there is no easy way through”. 

“Administering authorities and LGPS scheme employers are caught between a rock and a hard place, at a time when, sadly, many employers may be contemplating redundancies,” she said. 

“The lack of certainty about their pension benefits will cause additional stress for those facing redundancy. The introduction of the cap has been several years in the making, and the mismatch with the LGPS regulations was pointed out in previous consultations.

“It is disappointing, therefore, that the cap has been brought into force before the LGPS regulations are amended,” Ms Bartlett added.

MHCLG, the Treasury and the LGPS Advisory Board have all been approached for comment.