What changes are expected?

The government has said that it will not introduce a single compensation scheme for all public sector workers. Instead, it will introduce a new framework and each affected government department will need to structure its exit payment arrangements in line with that framework. The government is also proposing changes to the Civil Service Compensation Scheme, which will be relevant to civil servants (see below).

The framework includes:

  • a maximum tariff of 3 weeks' pay per year of service to be used to calculate exit payments
  • a cap of 15 months on the maximum number of months' salary that can be paid
  • a maximum salary of £80,000 to be used to calculate exit payments
  • a taper on the lump sum compensation as employees get closer to their normal pension retirement age
  • reducing employer-funded early access to pension as an exit term.

The government has, however, indicated that some departments may be permitted to deviate from this framework where a case can be made, for example, that applying the framework will not lead to significant cost savings, that an alternative approach may lead to commensurate cost savings or that applying the framework strictly would result in an unwarranted impact on equality.

Who will be affected?

The changes will apply to current and future public sector employees who are subject to existing statutory compensation schemes or other contractual exit arrangements.

This includes those working in the civil service, NHS, local government or armed forces, as well as teachers, police and firefighters.

The changes will also apply to any new compensation schemes set up for public sector employees.

The new rules will also affect private sector employers who inherit public sector employees after the introduction of these new compensation arrangements, as a result of the Transfer of Undertakings (Protection of Employment) Regulations 2006.

Scotland, Wales and Northern Ireland will need to decide whether to apply these changes to devolved bodies and workforces.

What is the timetable for change?

Government departments are expected to produce proposals consistent with the new framework by the end of the year.

Departments are then expected to consult with relevant trade unions and/or employee representatives, and full implementation is expected by the end of June 2017.

If meaningful reform is not achieved within this timetable, the government says it will consider using primary legislation to force the changes.

Transitional arrangements

The government recognises that the new framework could be unfair on those employees for whom exit packages have been negotiated and agreed prior to implementation but whose leaving date falls shortly afterwards. It therefore allows for transitional arrangements, the detail of which is left to be determined at workforce level, albeit with a warning that arrangements which seek to offer overarching protection from the reforms more generally will not be permitted (e.g. attempts to exclude a certain age group from the changes).

Are other changes likely?

Separate to this particular consultation, the government has previously announced other plans to curb public sector exit payments. These were to impose an overall cap of £95,000 on exit payments and to introduce the power to claw-back payments from individuals who return to public sector employment within 12 months of their exit.

Draft regulations in respect of both of these proposals have been published, but have not yet been laid before Parliament. Further consultation is anticipated in respect of the £95,000 cap in Autumn 2016, so it is unlikely to be in force until early 2017. The claw-back provisions may, however, still be brought into force later in 2016.

Civil Service Compensation Scheme

Alongside the general consultation on public sector exit payments, the government has also been consulting on specific reform to the Civil Service Compensation Scheme. It has now also published its response to that consultation, in which it sets out its formal offer to trade unions.

The terms of the offer are broadly aligned with the overall framework proposed for public sector exit payments (see above). In summary, the key terms are:

  • a standard tariff of 3 weeks' pay per year of service to be used to calculate exit payments
  • a maximum of 18 months' salary for Voluntary Exit and Voluntary Redundancy payments
  • a maximum of 9 months' salary for Compulsory Redundancy Payments
  • employer-funded top-up to pension allowed from age 55 and for this to track 10 years behind state pension age
  • partial buy out allowed for employees above minimum pension age where the cash-value of the exit payment is insufficient to fully buy out the actuarial reduction or where the full exit payment is otherwise affected by restrictions in legislation (e.g. the introduction of a £95,000 exit cap)
  • Compulsory Redundancy notice periods to be set at 3 months for new starters
  • the lower paid underpin will increase to £24,500
  • the Inefficiency Compensation tariff to be reformed to align with VR terms.

If these proposals are not accepted by the trade unions, the government will implement an alternative package with less favourable terms. The government expects the new scheme to be in place by early November.

These reforms will affect a large number of public sector employees and, judging by the views expressed during the consultation, are likely to meet with opposition. The timetable for change envisaged by the government may, therefore, prove difficult to meet.

The consultation response envisages that negotiation and consultation will take place between government departments and the relevant trade unions or other workforce representatives, and that the government departments will be responsible for implementation.

For public sector employers who are not government departments and who have employees whose exit terms are not determined by schemes or arrangements set by the Cabinet Office or a government department, the consultation response does not offer much clarity. It simply says that "in other areas" the government would encourage reforms consistent with the principles set out in the response. It is possible that the government will have corresponded with the employer's accounting officer about these proposals, and may have set out the governments expectations in any such correspondence.

In any case, public sector employers should review the exit terms currently available to their employees and determine what the source of those terms is. Where an organisation has exit terms in place that are not determined by the Cabinet Office or schemes or arrangements set by their sponsoring government department, it will need to determine the status of those exit terms, consider formulating new proposals, and set a strategy for engagement with employees and/or trade unions.

Employers should also consider the impact the changes might have on any forthcoming restructuring programmes.