How did the government respond to the consultation on its plans to introduce a public sector exit payment cap of £95,000?

The government has issued its response to its recent consultation on capping public sector exit payments at £95,000. We reported on the details of the consultation here. The core elements of the government’s proposals have been retained and the government intends to legislate to introduce the cap largely in the form it originally proposed. It will implement the cap through the Enterprise Bill and further secondary legislation.

Core elements of the cap:

• The government has committed to addressing six-figure exit payments in the public sector by introducing a cap on total cost of exit payments of £95,000 thus adhering to a manifesto commitment made in April 2015
• Applicable to all types of arrangement for determining exit payments
• Cap will cover payments made in relation to leaving employment, including voluntary and compulsory exits, ex-gratia and special severance payments, employers costs of providing early unreduced pension, payments in lieu of notice (PILONs) and payments relating to other outstanding entitlements
• There will be a waiver process
• The cap will apply to current and future public sector employees and office holders, Ministers and Special Advisers. Certain public sector bodies will be exempted from the cap but expected to implement their own, commensurate cap

Level of the cap: most responses did not comment on this, and few suggested an alternative cap level. The government is therefore retaining the proposed figure of £95,000 before tax for the cap, although it will keep this under review.

Payments that are to be included in the cap: a significant number of respondents raised concerns in relation to the inclusion of payments for untaken annual leave, payments in lieu of notice (PILONs), special severance payments and early access to unreduced pensions. The government has agreed not to include untaken annual leave in the cap (provided this is not additional leave that has been granted), but will include all of the other payments within the cap. It considers that this approach will ensure the cap is fair and is not subject to avoidance through individuals taking early retirement or being offered other forms of payment.

Early retirement pensions: the government does not consider that the inclusion of early retirement pensions in the cap is contrary to the 25 year guarantee on pension reform made by the government in the last Parliament. It believes the proposed waiver system will provide important flexibility, and it states that the changes will have no impact on individuals’ accrued pension rights.

Waiver process: the proposed waiver system will allow the cap to be waived subject to Ministerial, Treasury or Full Council approval (depending on the nature of the organisation). The system is intended to enable decisions to be taken on individual cases where there may be exceptional circumstances that justify the cap being relaxed.

Bodies covered by the cap: the list of proposed exempt bodies, which includes various state-owned banks, financial bodies including the Bank of England, the BBC, the Armed Forces and MPs will remain the same but the government re-states its expectation that exempt organisations will introduce a commensurate cap of their own, and confirms that it will engage with those organisations on that basis, keeping the exemptions under review.

TUPE protection: respondents to the consultation who commented on the TUPE position were in support of protecting rights that an individual may have to a specific exit payment under TUPE terms. The government response states that it “is minded not to include those individuals with protected TUPE terms in scope of the cap.” It gives no further detail at this stage.

Impact on the Local Government Pension Scheme

The government remains committed to its intention of applying the cap on exit payments so that it includes the cost to local authority employers of enabling local authority employees to access their pension on early retirement. As we indicated in our initial blog this is likely to require an amendment to Local Government Pension Scheme regulations particularly as the regulations provide for an immediate unreduced early retirement pension for members made redundant on or after age 55, and a reduced early retirement pension from age 55 which does not require employer consent. The government’s consultation response does not comment on the individual regulatory changes which might be required. Instead it notes that “a number of respondents raised detailed technical issues connected with the implementation of the cap”, which will “inform the government’s thinking as it develops the legislation to deliver the cap”.

We will monitor any proposed legislative changes and report on them when they come to light.