Reward insight
Public sector exit payments
Peter Minchinton, employment taxes consultant at PSTAX, reviews the termination payments cap and its impact
P erilously close to the initial deadline of October 1, the government issued a response to the proposal to impose a £95,000 cap on termination payments. Although the government issued the proposal and knows what it wants to achieve it appears to have no idea how to put it into practice. Therefore, it has decided to let each sector sort out the practical problems themselves. The government expects departments to put forward proposals for reform within three months of the publication of the response. Departments should then consult on proposals as appropriate and should follow the normal process of discussions and negotiations with trade unions and other workforce representatives in order to seek agreement. The government expects this discussion process to be concluded, agreement reached and the necessary changes made to compensation schemes and other arrangements within nine months of the publication of the response which would bring us to the end of June 2017. The draft legislation has been in place for some time but may need revising to take into account the proposals following the response to the consultation document. It would therefore seem unlikely that the start date for these proposals will be before July 2017. The main points Payments will be based on a maximum of three weeks’ pay per year of service with a ceiling of fifteen months. The maximum salary on which the termination payment can be made is expected to be in line with the existing National Health Service (NHS) scheme salary limit of £80,000 with a taper on the amount of lump sum compensation an individual is entitled to receive as they get closer to their normal pension age. Contributions to pension funds are not
exempted either. The government intends to limit or end employer-funded early access to pensions. As part of the arrangements agreed by each department the government is likely to cap the amount of pension top ups to no more than the entitled redundancy sum or even remove the ability for employers to make top ups all together. There is also a proposal to increase the minimum age at which an employee is able to receive an employer-funded pension top up, so that this minimum age is closer to or otherwise linked more closely with the individual’s normal pension age.
40% of civil servants being over fifty. So, it is unlikely that a ‘one size fits all’ approach would work, but the government is keeping in mind the option of introducing primary legislation should agreement not be reached by each section of the workforce. Where to from here? Interestingly, of the 350 respondents to the initial consultation, the majority of them were opposed to the proposals, but the government is pressing ahead anyway. However, the government does not believe that there is a case at present for a fundamental reform of the way in which public sector exit terms are determined and delivered. It believes that it is an important principle that exit arrangements are determined at workforce level, including through collective agreement where this is currently the case. This allows exit terms to reflect the particular circumstances and needs of each workforce. Accordingly, the government has no plans to replace existing arrangements for determining exit compensation at workforce level with a single compensation scheme for all public sector workers at this point in time. Which leaves us nearly as far away from a solution as we were when the original consultation came out. The aim is to cut £250 million from the termination payment bill, but 97% of termination payments in 2014/15 would not have been affected by the proposals had they been in place at the time. However, this means that, over the next nine months, enormous amounts of time and money will be consumed putting together separate workforce policies which, in most cases, will not apply. We can only hope that common sense prevails and the parties can come to an arrangement quickly and this policy can be consigned to the rule book. n
...aim seems to be to provide an overarching framework...
The £95,000 limit The limit will be imposed on most payments made in relation to leaving employment, including compensation packages where there is impending or declared redundancy or in other situations where individuals leave with employer-funded exit packages. At least the government has said that these reforms will not affect any payments into funds made in relation to death or injury attributable to duty or ill health retirement. The government has not provided advice on the order in which payments should be allocated. The aim seems to be to provide an overarching framework and then let different workforces agree the terms of the termination policies. This has been considered because of variation in sex and ages between different areas of the public sector. As the response points out, 75% of the workforce in the NHS and teaching professions is female and 85% of fire-fighters are male with
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Issue 26 | December 2016/January 2017
| Professional in Payroll, Pensions and Reward |
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