A recent Pensions Ombudsman decision serves as a reminder to public sector bodies to act with care when drafting and implementing voluntary severance schemes.

Mrs Fenteman-Coates (the "applicant") complained to the Ombudsman after her application for voluntary redundancy from NHS South Yorkshire and Bassetlaw PCT cluster (the "authority") was accepted but had her application for an unreduced early retirement pension under the voluntary redundancy scheme refused.

The authority had previously refused her application for voluntary early retirement on the ground that it did not represent value for money. It was then suggested to her that she could apply for "voluntary redundancy" as the authority thought this would not trigger an additional liability under the NHS Pension Scheme Regulations to pay an unreduced early retirement pension.

When the complaint eventually went to the Ombudsman, it was noted that no such distinction could be drawn under the Regulations between voluntary and compulsory redundancy. The authority was, in reality, reducing the number of its employees due to "a diminished need for employees to do work of a particular kind". The termination was still a 'redundancy' for the purposes of the Regulations.

The Ombudsman recognised that a genuine error had been made by the authority in accepting the member's voluntary redundancy application, but it nonetheless held that the applicant should be entitled to access an unreduced early retirement pension. The Ombudsman also held that the value of the applicant's redundancy payment should be offset against the increased pension costs to be met by the authority. The applicant was awarded an additional £250 for compensation for the stress and inconvenience caused.

Public sector organisations should give careful consideration to the potentially costly employment and pension issues which could arise from operating any sort of voluntary early release scheme ("VERS"). Some of the main issues to think about include:

  • The content and criteria of the VERS policy documents at a strategic level - ensuring they accurately reflect the conditions of any grant;
  • Avoiding discrimination: auditing and assessing the impact of the criteria associated with granting VERS applications, including whether certain categories of employees can be justifiably excluded from VERS (e.g. certain age bands or fixed term employees);
  • Structuring VERS criteria and/or payments to eliminate or reduce the risk of discrimination;
  • What are the potential substantial pension and other cost implications for the employer of employees exiting through VERS (e.g. "strain on fund" costs within the Local Government Pension Scheme, "premature retirement compensation" through the Scottish Teachers' Superannuation Scheme, "redundancy/voluntary redundancy" benefits in the NHS Pension Scheme or any other retirement benefits provided in "regulated" industries) and how they can be catered for?;
  • Closing off any residual liability for the employer by entering into Settlement Agreements with employees exiting under VERS, including pension clauses to reflect the risks referred to above.