A commitment to reduce public sector termination packages has seen the Government explore various proposals for reform in recent years; from draft regulations seeking recovery of termination payments, to a financial cap upon the amount of any individual payment and a review of certain payment calculations and tax issues (see our earlier e-brief). Initial indications of timescale for such reforms suggested they might start to take effect from as early as April 2016. But things then fell quiet ….until this week’s announcement.
Although it is largely the other aspects of reform that have grabbed the headlines, such as a cap on exit pay, in its latest Response to Consultation the Government clarifies the reforms it now expects to compensation schemes across the sector. Whilst emphasising that it does not intend to change the mechanisms through which exit terms are currently delivered, the Government has confirmed it is nonetheless proceeding with plans to impose a framework of upper limits on payments to non-devolved workforces, in the interests of increased consistency and overall fairness. In keeping with these proposals, reforms of the Civil Service Compensation Scheme along similar lines are also proposed and currently under review with representative trade unions (Response to Consultation on CSCS Reform).
There is currently no further news on the other reforms referred to above, such as an overall cap on exit pay of £95,000 and the ability to claw payments back from returners to the sector, although the publication of this latest Response could suggest there is renewed momentum to progress exit pay reforms more broadly. However, these other factors will inevitably impact upon the application of the announced exit pay scheme changes in due course.
A framework for exit pay
The Response confirms that those Government departments responsible for the major public sector workforces will need to reform their existing exit pay arrangements in line with the following framework:
- A maximum tariff for calculating exit pay of 3 weeks’ pay per year of service;
- A ceiling of 15 months’ salary payable as a redundancy payment;
- Maximum salary threshold of £80,000 in most cases;
- The tapering of lump sum payments closer to retirement;
- Reducing employer-funded early access to pension (such as capping the amount of employer-funded “top-ups” to no more than entitlement on redundancy or increasing minimum age for eligibility).
In terms of those who will be affected by these changes, this will include current and future public sector employees in UK covered by:
- existing statutory compensation schemes / contractual exit arrangements (such as the Civil Service, teachers, NHS workers, local government workers, police officers, firefighters and the judiciary);
- any new public sector compensation scheme; BUT
- Scotland, Wales and NI will need to decide whether to apply to these changes to devolved bodies/ workforces.
A nine month window for action
Although the Response espouses “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);
- Within 9 months: agreement to be reached and necessary changes made to compensation schemes
Despite the suggestions of flexibility in approach alluded to elsewhere in the Response, 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.
The Response indicates that the Government recognises unfairness could arise for a small proportion of departing employees for whom exit packages have been negotiated and agreed prior to implementation of this new framework but whose leaving date falls shortly afterwards. The Government accordingly suggests that some form of transitional arrangements may be applied by individual sectors. It is of the view that the precise detail of such transitional arrangements is most appropriately dealt with at workforce level as part of the departmental proposals. Even so, it is clear that such arrangements will not be entertained where they seek to offer overarching protection from the reforms more generally, such as excluding a certain age group from the changes.
This latest set of proposals from the Government acknowledges that it not feasible or necessarily desirable to address the considerable differences between how exit pay is arrived at within differing sectors in one go. There are many and varied reasons why discrepancies have emerged over time, but the Government believes that putting in place clear benchmarks on elements of exit pay will introduce a greater degree of consistency and fairness.
“Flexibility” is not only a word pitted throughout the Response but is an expressly stated aim of the proposals as part of its “modernisation and improvement of public services”. It could also be indicative of a desire to tread cautiously in an area fraught with difficulty. However, it is also important that “flexibility” in the context of these new proposals does not lead to uncertainty. Without further guidance, it is already clear that departments will have scope to put forward alternative proposals which may leave them outside of the framework or aspects of it. Furthermore, uncertainty over what is permissible or desirable when it comes to transitional provision could leave workers in one sector in a much more advantageous position than in another.
These changes must also be viewed in the much broader context of public sector exit pay reforms, since confirmation of when an overall cap on such pay will take effect is still awaited, along with the finalised provisions allowing recovery of certain payments for staff who leave and return to the sector within a 12 month period. Separately, but no less significant in the longer term are the Government proposals to change the tax treatment of all termination payments from April 2018.