The long goodbye to public sector golden goodbyes: government starts a further consultation on exit payments

The government has launched a further consultation on public sector exit payments (5 February 2016).

This follows a consultation in July 2015 on capping public sector exit payments at £95,000 (see our most recent post on this here), and another in December 2015 on draft regulations aiming to ‘claw-back’ exit payments made to public sector employees earning over £80,000 per annum who return to employment within the public sector within twelve months. The ‘claw back’ changes are anticipated to come into effect by regulations from April 2016, while Parliament is still considering legislation on the exit payment cap itself as part of the Enterprise Bill.

Of particular interest from a pensions perspective in all of these consultations are proposals to reform and limit entitlements to immediate payment of an unreduced early retirement pension, and how these proposals may work in practice.

The consultation is running for 12 weeks and will close on 3 May 2016.

Fairness, modernity and flexibility and greater consistency

The government is now consulting on options to make public sector exit payments (in its view) fairer, more modern and more consistent. These proposals could affect nearly all public sector exit payments, not just those where the cost of the overall exit package exceeds £95,000. The government’s intention is that public sector exit payment terms will offer a proportionate level of support for exiting workers, and value for money for the taxpayer. The consultation outlines existing compensation payments across the public sector, and sets out the options for reform.

Policy proposals: a material impact on exit packages

The reforms (which do not apply to payments made by employers in relation to ill-health, injury or death during employment) being proposed are:

• Setting a maximum tariff for calculating exit payments at three weeks’ pay per year of service.
• Capping the maximum number of months’ salary that can be used when calculating redundancy payments at fifteen months.
• Setting a maximum salary for the calculation of exit payments, with one possibility for this being £80,000, a figure which is currently used for NHS redundancy payments.
• Enabling the amount of lump sum compensation that an individual is entitled to receive to be tapered as the individual nears normal retirement age.
• Reducing or removing the cost of employer-funded pension top-up payments, for example by limiting the amount of employer-funded pension top-ups for early retirement to no more than the value of the redundancy lump sum that would otherwise be payable (an approach used in the NHS), or by removing access to such top up payments completely, and/or by increasing the minimum age at which an employee is able to receive such a top up (currently the minimum age is usually 55).

Exit payments across the public sector vary, but in many cases currently they may be calculated on the basis of four weeks’ pay per year of service, and providing lump sum redundancy payments on the basis of up to 24 months’ pay. Some schemes provide these terms with the option for employees over a certain age to access an unreduced early retirement pension funded by an employer top-up payment in addition.

The reforms, if implemented, would have a material impact in reducing exit packages, and the government estimates that they could save hundreds of millions of pounds over the course of this Parliament.

Transitional protections for agreed arrangements

The reforms will apply to employee exits whether on a mutually agreed or voluntary basis, or through compulsory redundancy. The government expects the reforms to apply to existing and future public sector employees, with possible transitional provisions to protect workers who have already agreed, and had confirmed, exit payment packages before the reforms come into force, but does not anticipate going further by for example introducing transitional protection related to the age of individuals or their nearness to retirement age.

Depending on the outcome of the consultation, the government will look to the departments responsible for the main public sector workforces to negotiate and agree the reforms. The government may put a framework in place in primary legislation for this depending on the progress of the reforms.

The consultation states that the government will ensure that any reforms do not breach the 25 year guarantee on changes to public service pensions given in the Public Service Pensions Act 2013.

In addition to asking for input on the proposals for reform, the government asks responders to the consultation to provide information and data in relation to redundancy provision in the wider economy, which it will use to inform its response to the consultation.

Osborne Clarke comment: reconciling promises with proposals

The government has confirmed that these proposals to public sector employee termination packages will not breach the 25 year guarantee on further changes to public sector pensions, a promise it made when it introduced public sector pension reforms in the Public Service Pensions Act 2013. At that time, the government also promised that public sector employees within 10 years of normal retirement age would not be affected by those reforms.

It will be interesting to see how the government reconciles theses promises with any changes it proposes to make, and in particular concerning public sector pension fund members’ rights to retire with an unreduced early retirement pension payable immediately on redundancy occurring from age 55, where such rights arise under fund rules (for example, the Local Government Pension Scheme), rather than as an employer payment or discretion on termination.

The consultation does not contain any proposals addressing the impact of these changes on staff who are TUPE-transferred from the public sector to a private sector employer, and in particular staff who retain the right to their public service pension scheme under the government’s “Fair Deal” policy. Staff affected by a TUPE transfer could conceivably find themselves better off than if they had remained with their public sector employer. 

This latest consultation ranges wider than the two specific consultations already undertaken on the proposed £95,000 public sector exit payment cap and the proposed exit payment ‘claw back’ regulations. While the ‘claw back’ regulations are due to come into force in April 2016, no firm date has been set for introducing the cap, and the consultation on these latest proposals lasts until 3 May 2016. Stakeholders affected by these changes in coming months will need to be mindful of the various proposals and the various implementation dates. Arguably, an opportunity has been missed by not consulting on all of these matters at the same time.