Treasury consults on £95,000 cap on public sector payouts

The Treasury is consulting on draft regulations to introduce a cap of £95,000 on exit payments in the public sector, which are being introduced in response to concerns about the number of such payments that exceed or come close to £100,000 and the need to ensure they represent value for money

The Small Business Enterprise and Employment Act 2015 as amended by the Enterprise Act 2016 sets out the duty to implement the cap through secondary legislation.

The 12-week consultation sets out the proposed draft regulations, schedule to the regulations, accompanying guidance and directions.

The Treasury says exit payments to employees leaving the public sector workforce in 2016-2017 cost the taxpayer £1.2 bn, with payments at and above £100,000 amounting to £0.2bn. The government does not believe that the majority of six figure exit payments are proportionate or provide value for money for taxpayers.

The draft schedule sets out in detail the proposed scope of the regulations for this first stage of implementation. The government will expand the bodies in scope to the whole of the public sector in due course, with exemptions for certain bodies on a case by case basis.

In order to determine whether a body is ‘public sector’ for the purposes of the cap, the Treasury will be guided by the Office for National Statistics classification.

The first stage  regulations cover the majority of public sector employees, including the UK Civil Service, its executive agencies, non-ministerial departments and non-departmental public bodies; the NHS in England and Wales; academy schools; local government including fire authorities’ employees and maintained schools; and police forces including civilian and uniformed officers.

Where a body or office is not included in the schedule, there will be no legal obligation under the regulations to apply the cap to an exit payment. However, the government expects them to apply commensurate arrangements voluntarily. The armed forces, the Secret Intelligence Service, the Security Service and the Government Communications Headquarters are exempt from this expectation.

A newly created public sector body will not be in scope of the regulations until it is added to the schedule. This is the case even where the new body is carrying out employment functions which used to be the responsibility of a body which was in scope of the regulations. However, it is the government’s expectation that such bodies will apply their own commensurate arrangements voluntarily.

Regulations

An exit payment is subject to the cap if it is the type of payment which is made in consequence of termination of employment or office whether or not a contract of employment applied.

Under the regulations, ‘salary’ means the annual value of remuneration that the person was contractually entitled to receive for the salaried employment or office on the date they left. This includes any benefit in kind.

The Treasury’s expectation is that an exit payment should be considered to have been received in full on the date the recipient’s employment ended, or that person ceased to hold the office.

The regulations provide a standard legal underpin in respect of exit payments made by relevant authorities. However, they do not prevent those authorities from applying alternative contractual capping arrangements where those provisions go further than the regulations.

The exit payment cap applies to the total cost for the public sector employer, as calculated under normal processes. For example, in the case of a pension top-up payment, the capped amount may be the amount as calculated by the scheme actuary.

The exit payment cap only applies where there is an extra cost to the employer in relation to that exit. As such, payments – or elements within payments - that result from an individual’s accrued right to a pension, including additional pension purchased with the individual’s own monies, are not exit payments for purposes of the cap.

However, pension ‘strain’ payments are within the scope of the cap. These are payments made by an employer as an additional contribution to a pension scheme in respect of an individual’s exit, so that the individual receives a greater pension than they would otherwise be entitled to. There are also special arrangements for pension lump sums available to firefighters who are aged 55 or over, or who have accrued the maximum 30 years’ service under the fire service pension scheme.

The total value of the exit payments need to be calculated (measured in terms of current costs, for example when considering the value of extra continuing pension). Where the total would exceed the exit payment cap, the regulations prescribe the sequence in which exit payments will have been paid for the purpose of applying the cap.

The government’s expectation is that employment contracts, compensation schemes and pension schemes will be amended to reflect the introduction of the cap.

Employers must keep a record of exit payments made to an employee or office holder.

When calculating whether an individual’s exit payment should be subject to the £95,000 cap, employers must take into account all payments related to exit received by the individual within a 28 day period.

Where two or more relevant exits take place on separate days in any period of 28 consecutive days, the exit payments are treated as having been paid in chronological order for the purpose of calculating the cap. For example, where an individual leaves employment with authority A with an exit payment of £50,000, then leaves employment with authority B within 28 days, authority B should not make an exit payment in excess of £45,000.

Where a capped exit payment comprises several elements such as a contractual redundancy lump sum and a pension top up payment, it is for the responsible authority to establish how the elements are subject to the cap. However, individuals are entitled to receive the full sum of their statutory redundancy entitlement.

Records

Whole of Government Accounts returns may request information relating to the exit payment cap, or any exit payments made by the relevant body, for later publication. Where the cap is relaxed, the responsible body must keep a separate record of the exercise of the power, to be held for a minimum of three years and the government recommends details are included in their published accounts.

Any payment that exceeds the cap and is not compliant with the relaxation directions is considered to be a payment beyond the organisation’s legal competence, which may result in sanctions..

The government accepts that there will be some circumstances where it is necessary or desirable to relax the restrictions imposed by the regulations. This safeguard is in place for use in exceptional situations, including where imposing the cap would cause genuine hardship.

The power to relax restrictions imposed by the regulations may be exercised in respect of individuals, or in very exceptional circumstances, in respect of a group of employees for example, where redundancies occur as a result of specific workforce reforms.

The consultation closes on 3 July 2019.

Open consultation, Restricting exit payments in the public sector

Report by Pat Sweet

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