Public sector exit payments to be reformed

The Government has confirmed that it intends to push ahead with its proposed reforms to public sector exit payments, following consultation.

The Government has confirmed that it intends to push ahead with its proposed reforms to public sector exit payments, following consultation. HM Treasury’s response to the consultation on reforms to public sector exit payments tells us that the Government has not seen evidence to change their view that applying upper limits to the calculation of exit terms in the public sector will be fairer, more modern and more consistent (and undoubtedly more importantly will save the Government £250 million per year). When either collectively agreed or imposed by law, these changes will represent a significant alteration to payments and pension provisions made on redundancy or severance across the public sector.

The detail

All compensation schemes for public sector employees are to be reformed to apply consistent principles.  This will include Civil Service, NHS, Local Government, Teachers, Police and Firefighters.  The Government expects departments to produce proposals to implement the principles by the end of 2016 and to have made the necessary changes by the end of June 2017. There may be protections for exits agreed before the new arrangements come into effect.  It will be for the Scottish and Welsh Governments to decide whether to take forward similar arrangements in relation to devolved bodies and workforces.

The principles are:

  • A maximum tariff for calculation of three weeks’ pay per year of service;
  • A ceiling of 15 months pay as the maximum payment;
  • A maximum salary on which an exit payment can be based, currently envisaged to be £80,000;
  • Tapering of lump sum payments when normal pension age is close;
  • Action to limit or end employer-funded early access to pension within exit packages. These will be workforce specific but could include capping top ups at the redundancy lump sum limit, and/or removing the ability of employers to make top ups altogether; and
  • Increasing the minimum age at which an employee is able to receive an employer funded pension top up.

These proposals are in addition to the provisions relating to: recovery of exit payments where those exiting are re-employed in the public sector; and the £95,000 cap which will be applied to exit payments (about which we have previously reported).                   

What does this mean for me?

When implemented these changes will reduce the compensation payable to most public-sector employees on redundancy. For example, most NHS redundancy payments are currently calculated on the basis of one month’s pay for each year worked and this will need to drop to three weeks per year. Many public sector schemes currently have an overall cap of two years pay, which will drop to fifteen months.   

There will not be a single scheme across the public sector; the different current arrangements will remain in place.  However those arrangements will need to be changed to comply with the principles. These changes will significantly cut the cost of redundancies.  If/when implemented, the biggest change may be the proposed reduction in contributions to facilitate early access to pensions (or the abolition of it altogether).

Comment

Perhaps the most understated part of the document is where it records that Departments should follow the normal process of discussions and negotiations with Trade Unions and other workforce representatives in order to seek agreement to the reforms proposed.  Whether this will be capable of being achieved is doubtful.  What we are told is that should meaningful reform not be achieved in this way, primary legislation will be considered.  In other words, if not collectively agreed this will be imposed by law.

If this raises any issues for your organisation, please speak to your usual contact in the Weightmans employment pensions and immigration team (or Phil Allen on phil.allen@weightmans.com). In practice the precise implications will not be clear until each individual collective agreement has been reached (or legislation passed).

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