Government reforms (1): Public sector exit payments – what’s next?

What do we already know?

We updated you in our February 2016 Newsflash Reforming public sector exit payments – consultation that the Government had published a consultation (available here) on reforms to public sector exit payments (affecting the civil service, the NHS, teachers, police, fire-fighters, members of the armed forces and employees of local authorities).

The consultation document set out a package of proposed maximum levels for the calculation of exit packages, designed to make compensation terms fairer, more modern and more consistent. The consultation closed on 3 May 2016.

The proposals in the consultation are in addition to:

• the Government plans to cap exit payments made to public sector workers at £95,000 (see October 2015 Newsletter Government reforms (1): Cap on exit payments).  The cap is likely to become law in early 2017 after a further consultation this Autumn on the relevant regulations;
• “clawback” of exit payments where individuals return after a short period of time to work in the public sector; and
• change in the tax treatment of all termination payments from April 2018 (see our August 2016 Newsletter Taxation of termination payments).

What’s new?

HM Treasury published its response, available here, to the above consultation on reforms to public sector exit payments on 26 September 2016.  Most of the 350 responses to the consultation were opposed to the proposals in the consultation, including that exit payment terms in the public sector have historically been set by collective agreement and balance the needs of employers and employees in each workforce and that there would be a negative impact on staff morale and an erosion of public sector terms and conditions.  However, the Government intends to proceed with the proposed reforms in any event, indicating that they could achieve savings of up to £250 million a year, while bringing public sector exit terms in line with those commonly available in the private sector.

The Government intends to:

• Set a maximum tariff for calculating exit payments at three weeks’ pay per year of service;
• Introduce a cap of up to 15 months’ salary on all redundancy payments. However, the Government has stated that where employers offer voluntary exit packages that are not classed as redundancies, there may be a case for varying this limit;
• Set a maximum salary for the calculation of exit payments. As a starting point, the Government will expect this to align with the existing NHS scheme salary limit of £80,000;
• Taper the amount of lump sum compensation an individual is entitled to receive as they get close to the normal pension age or target retirement age of the pension scheme to which they belong, or could belong, in that employment; and
• Reduce the cost of employer-funded pension top-up payments, such as limiting the amount of employer-funded top ups for early retirement, or removing access to them and/or increasing the minimum age at which an employee is able to receive an employer-funded pension top up.

The Government will require its departments responsible for each workforce to agree reforms to their exit payment arrangements that are consistent with the above framework. These departments should then implement these changes through, for example, changes to secondary regulations or other instruments governing compensation.

Although the response to the consultation talks of allowing “a limited degree of flexibility” and recognises that some departments are likely to seek permission to deviate from the framework in some areas (for example, where the framework might result in demonstrable inequality or will not achieve cost-saving), it also states clearly that the Government expects its departments to begin work “immediately” to produce appropriate proposals for compliant reforms for their workforces by July 2017.

The timeframe the Government has set is as follows:

• Within 3 months: Government departments to put forward their proposals;
• 3-9 months: consultation and negotiation to take place with appropriate parties (trade unions and worker representatives); and
• Within 9 months: agreement to be reached and necessary changes made to compensation schemes

This timeframe for action is accompanied by a clear warning that a failure to achieve meaningful reform within the timescales envisaged may lead to primary legislation to force the changes. The Government’s timescales may prove particularly challenging in some sectors, such as local Government, where changing the rules on employer-funded pension “top ups” cannot be achieved without changes to regulations.

Implications?

These proposals will affect a far greater number of public sector employees than the cap on exit payments and the power to claw back exit payments from employees who return to the public sector. For example, the response indicates that more than 97% of exit payments in the public sector in 2014/15 were below £95,000 in any event.

Given the opposition expressed by the respondents to the consultation and the fact that the public sector is heavily unionised, it is likely to be difficult to implement these changes in the way envisaged by the Government, and within the anticipated timescale.