Why a cap?
Between 2011 and 2014 the cost of exit payments in the public sector was around £6.5 billion, and more than £1 billion of this cost came as a result of exit payments costing more than £100,000, including a former deputy director-general of the BBC, who received a settlement of £1 million when he left the corporation. The government states that it “does not believe that six figure exit payments…are fair or offer value for money to the taxpayer who funds them.” It is therefore proposing a cap of £95,000 on the total value of exit payments. The consultation seeks views on the scope, level and design of the cap.
Scope of the cap
It is planned that the cap will cover current and future employees and office holders, ministers and special advisers in central and local government. The government is considering exempting certain public sector bodies from the cap, including the armed forces, the BBC and various financial corporations such as the Bank of England. However it states that its strong expectation is that these bodies will come forward with their own, commensurate cap on exit payments.
What will the cap apply to?
The proposal is that the cap will apply to voluntary and compulsory exits, and to all forms of exit payment available. The latter will include ex gratia and severance payments, the monetary value of any extra leave or other benefits granted as part of the exit process, and payments in lieu of notice or relating to the cashing up of outstanding entitlements such as leave or allowances. It is proposed that compensation payments in respect of serious ill-health and ill-health retirement will not be in scope, and neither will payments made following litigation for breach of contract or unfair dismissal.
How will this affect early retirements on an unreduced pension?
The consultation highlights that exit payments may take a number of forms, including early access to an unreduced pension. Typically, an employer would bear the cost of ‘buying out’ the actuarial reduction that would otherwise have applied to the pension on account of it being taken early.
The government is proposing to include the potential benefits to employees who are offered early access to pension in place of, or in combination with, a lump sum compensation payment within the £95,000 cap. The proposal is that employees would retain the option to take early retirement on an unreduced pension, where this is available, but the extra cost to the employer of offering this benefit should not exceed the £95,000 cap. If a lump sum redundancy payment is offered as well, then the total employer cost of buying out the reduction in pension and the lump sum redundancy payment should not when taken together exceed the value of the cap.
The government’s intention is that this policy will apply equally to early access to pension for local government workers. Unlike other public service schemes, the Local Government Pension Scheme (LGPS) sets out an entitlement to an unreduced pension for employees aged over 55 who leave employment on grounds of redundancy. However the government does not believe there is any reason to exempt local government workers from the cap as it will apply to other public sector workers.
It therefore intends that the employer cost of funding early access to unreduced pensions in the LGPS will be within scope of the cap. In our view, this is likely to require statutory amendment as these rights are set out in the rules of the LGPS which are contained in regulations.
How will the cap be enforced?
Affected organisations will be required to maintain records and publish annually details of all exit payments during the financial year, for transparency and to ensure that the cap can be enforced.
It will be possible for the cap to be waived with the consent of the relevant Minister, or in local government on a decision of the Full Council.
How will the cap apply to outsourced public sector workers?
A question arises as to how outsourced public sector staff, who took the terms of their public sector employment with them under TUPE on the outsourcing, will be treated. The consultation asks how the government should approach employees in this situation.
It might be questioned whether this is action being taken after the horse has bolted, given the number of public sector workers that have already been cut through the economic downturn, with corresponding amounts already spent on exit payments in excess of £100,000. Headlines about senior public sector executives being paid large sums to leave office are nevertheless presumably a continuing source of embarrassment to the government and this is a move to counter this. That said, the government’s proposals may have unintended consequences, as more modestly paid local government workers could be impacted by plans to limit their unreduced early retirement pension payable on redundancy.
In deciding how to apply the proposed cap to outsourced public sector workers the government will need to take into account how this will impact on a service provider’s propensity to harmonise benefits with its non-outsourced staff.
The consultation also states that the government is considering further reforms to the calculation of compensation terms and to employer-funded early retirement in circumstances of redundancy, and that it plans to consult on possible measures in these areas in due course.
This consultation runs to 27 August 2015.