Sarah Lamont shines a light on the recent raft of complex proposals designed to clamp down on public sector exit payments – what are the details and what's the likely practical impact for your organisation?

The proposals

At the risk of causing some confusion amongst employers, there are currently three separate proposals on the table to reform public sector exit payments.

  1. A cap on of £95,000 on the aggregate value of exit payments made to most public sector workers, under the draft Public Sector Exit Payment Regulations 2016.
  2. Recovery of exit payments made to 'high earners' in the public sector who are re-engaged in the public sector within a period of 12 months. Draft regulations are due to take effect from April 2016.
  3. Wider review of restrictions on public sector redundancy payments. These proposals are currently open for consultation.

Looking at each of these developments in turn, their impact on public sector employers will be significant.

1. Cap on exit payments

The £95,000 cap on all exit payments to most public sector employees apply to, among other bodies, local authorities, the NHS, the police force, and schools, although Housing Associations will be exempt. Although no date for implementation has been given, it is anticipated that the cap will be in place by Summer / Autumn 2016.

In certain (currently unclear) circumstances the cap may be waived with ministerial consent / full council consent; but it seems unlikely that this power will be utilised on a regular basis.

The scope of the cap is wide and will apply to:

  • redundancy and voluntary exit payments
  • payments to reduce or eliminate an actuarial reduction to a pension on early retirement
  • payments to discharge liability under a fixed-term contract
  • payments by way of shares on loss of employment
  • any other payment (whether or not contractual) made in consequence of loss of employment, including payments in lieu of notice.

The cap will not apply to:

  • payments made for incapacity or death as a result of accident, injury or illness
  • payments of accrued but untaken holiday
  • bonus payments
  • payments made in damages ordered by a court
  • early retirement payments to firefighters
  • payments to employees with protected terms following a TUPE transfer.

We understand that the draft regulations implementing this scheme have been published for the purpose of parliamentary debate only, so further changes may be on the horizon.

2. Recovery of exit payments – an update

The proposals in relation to the recovery of exit payments are more developed than those in relation to the £95,000 cap. The current proposals are set out in the draft Repayment of Public Sector Exit Payments Regulation 2016 and there have been some significant changes from the original proposals.

Original proposal

Current proposal

‘Minimum salary’ to which the recovery provisions will apply: £100,000 per year.

Recovery provisions will apply to employees who earn over £80,000 per year.

Recovery allowed only where an employee returns to the same part of the public from which they had exited.

Recovery will be allowed where an employee returns to any part of the public sector.

Full amount to be recovered if return within 28 days, and pro rata amount recovered thereafter.

No recovery 12 months after exit.   Tapered recovery over 12 months following exit, starting from the first day after exit.

Excluding from recovery employer payments to provide unreduced pensions for early retirement under the Local Government Pension Scheme (LGPS).

Including in recovery employer funded pension top-up payments made under the LGPS.

In designing this scheme, the government has closed off the possibility of individuals avoiding repayments by returning to the public sector as a self-employed consultant or providing services through a limited company – such arrangements will trigger recoupment under the regulations.

3. Wider review of restrictions on public sector redundancy payments

Finally, earlier this month the government started consulting on wider public sector redundancy payment reforms. Current proposals include:

  • setting a maximum exit payment of three weeks’ pay per year of service
  • setting a maximum of 15 months' redundancy pay
  • setting a maximum salary for the calculation of exit payments
  • tapering entitlements for individuals who receive an exit payment when close to retirement / target retirement date for that employment
  • limiting employer-funded pension top up payments.

What does this mean for me?

Public sector employers will need to keep a keen eye on the progress of the proposals outlined above. Although the broad principles are unlikely to change, the schemes will be subject to careful scrutiny and we may well see some tweaks to the detail before the relevant legislation is ready to be 'laid' before Parliament.

In terms of the practical impact on employers, these reforms may pose a number of challenges:

  • the wide-ranging impact of the £95,000 cap: the inclusion of pension enhancements could mean that long-serving, albeit lower earning, employees could quickly reach the £95,000 cap
  • workforce planning difficulties: for example, employees seeking to volunteer for redundancy or early retirement before the restrictions bite; whereas employers may look to delay departures until after payment restrictions are in place, in order to manage costs
  • indirect discrimination claims may be an issue, as restrictions on exit payments may disadvantage older, long-serving employees
  • greater strain on workforce exit negotiations, as employees may seek to litigate claims through to a final hearing in order to avoid the exit payment cap and clawback
  • a possible 'brain drain' into the private sector, as employees seek to avoid repayment provisions by staying outside of the public sector for at least 12 months after exit.

Please do contact me, or your usual Bevan Brittan contact, if you would like more information on these reforms or if you wish to discuss how we may assist with managing the impact of these changes in your organisation.

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