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Reforms to public sector exit payments

In February, HM Treasury published its consultation on the next stage of plans to reform public sector exit packages.

In February, HM Treasury published its consultation on the next stage of plans to reform public sector exit packages. This follows the Government announcement in May 2015 that it intends to end six figure exit payments for public sector workers and impose a cap of £95,000.  Given the pace of change it can be confusing as to what changes are proposed and when they will be in force. This is a quick guide to the proposed changes.

The clawback provisions

Provision is contained in the Small Business, Enterprise and Employment Act 2015 for regulations to be made requiring the repayment of some or all of an exit payment where an employee leaves the public sector with an exit package and is then re-employed within the public sector within twelve months.

  • The Repayment of Public Sector Exit Payment Regulations introduces a claw back on redundancy payments. The regulations broadly cover the following type of exit payments:
  • Voluntary and compulsory redundancy payments;
  • Payments made to secure a voluntary exit from employment;
  • Discretionary payments to buy out actuarial reductions in pensions to allow for early retirement; and
  • Other payments made as a result of loss of employment (with the exception of payments in relation to outstanding contractual entitlement, such as holiday, and payments in lieu of notice). 

It is only high earners that are intended to be caught by these provisions, which is any public sector employee whose earnings amount to £80,000 per annum or over (initially the proposed threshold had been £100,000). The requirement to repay the full amount of the exit payment takes effect if the individual returns to public sector employment within 28 days. If they return after 28 days but before 1 year, the repayment amount reduces. No repayment is required if the individual returns after a year.

It is expected that these regulations will be in force from 1 April 2016.

The exit cap

Provisions are made in the Enterprise Bill (currently making its way through Parliament), which would impose a cap on the cost of an exit package for individuals leaving public sector employment.  The Bill passed its third reading in the House of Commons on 9 March 2016.

The Bill inserts provisions into the Small Business, Enterprise and Employment Act 2015 for regulations to be made to ensure that the total amount of exit payments made to a person in public sector employment shall not exceed £95,000. The Public Sector Exit Payment Regulations were issued in draft form to assist Parliament in considering the Bill (so may be subject to change).

The regulations broadly cover the following type of exit payments:

  • Voluntary and compulsory redundancy payments;
  • Payments to a pension scheme;
  • Payments in lieu of notice under a contract of employment;
  • Payments made under a settlement or conciliation agreement;
  • Payments made by way of shares consequent on loss of employment; and
  • Any other payments made as a consequence of loss of employment.

Most public bodies will be caught by the cap, although it will be for the Scottish, Welsh and Northern Irish governments to decide whether they wish the cap to apply to devolved bodies.

This has particular implications for Local Government employees as the Local Government Pension Scheme (LGPS) is a funded scheme and provides for the immediate payment of an unreduced pension for members made redundant on or after age 55. An unreduced pension payment causes an ‘actuarial strain’ for the LGPS, which will usually require a significant ‘top-up’ payment to be made to the LGPS fund from the relevant public sector employer. This ‘top-up’ payment could well exceed the £95,000 exit payment cap. Provisions in the Bill specifically amend the LGPS Regulations 2013 to deal with this, so that the member may take a reduced pension where the exit cap does not cover the whole of the ‘actuarial strain’, or alternatively the member would have the option to pay the extra amount required by the LGPS fund to pay the full unreduced pension.        

It is not clear when the Government intends to implement the exit cap provisions, but it is likely to be later this year.

Reducing redundancy pay-outs

In its paper “Consultation on Reforms to Public Sector Exit Payments” HM Treasury is consulting on options to make public sector exit compensation terms “fairer, more modern and consistent”.  The consultation period closes on 3 May 2016.

Subject to the outcome of the consultation the government will look to departments responsible for the main public sector workforces to negotiate and agree the reforms to the existing compensation arrangements on redundancy and then implement the changes.

The proposals under consideration are:

  • Setting a maximum tariff of three weeks’ pay per year of service for calculating exit payment;
  • Capping the maximum number of months’ salary that can be used when calculating redundancy payment to 15 months, with possibly a lower limit for compulsory redundancies to encourage employees to accept voluntary redundancy;
  • Setting a maximum salary, such as £80,000, for calculation of exit payments;
  • Tapering the amount of lump sum compensation that can be received as the individual gets closer to normal pension age;
  • Limiting or ending employer funded top-up payments to pensions.

The paper suggests three possible approaches to pension enhancements on redundancy:

  • Capping the cost of employer-funded enhancements to pension schemes, so that they are no more than the amount of the redundancy lump sum which the employee would otherwise be entitled to. This approach is currently applied by the NHS;
  • Prohibiting employer-funded pension enhancements entirely, but with the option for the individual to use their lump sum exit payment to increase their pension entitlement; or
  • Changing the age at which individuals have early access to employer-funded pension enhancements, such as 5 years before normal pension age (i.e. 5 years before age 67 or 68).  This would represent a substantial change under schemes such as the LGPS, where employer-funded enhancements can be accessed from age 55.
  • An area not addressed by this consultation, and which is also outside of the scope of the exit payment cap, is what impact (if any) these proposals will have on ex-public sector workers who have previously transferred under TUPE to a private sector contractor as a result of public sector outsourcing. Under the principles of Fair Deal or under the terms of the Best Value Direction, such employees may remain in the public sector scheme they were members of prior to the transfer. If these individuals are outside of the scope of the proposed changes, then the private sector employer may still be liable to pay the full pension top-up amount, and it may make for an interesting situation if these individuals are subsequently taken back in-house again.    

Jane Marshall is a Partner in the Employment, Pensions and Immigration Team.

If you would like to discuss the issues raised in this article, please contact Jane (jane.marshall@weightmans.com) or speak to your usual Weightmans adviser.