How does the Government plan to cap public-sector exit payments?

Author: Susie Munro

The Government has published its response to the April 2019 consultation on capping public-sector exit payments at £95,000. We look at the detail of the proposals and how they could affect redundancies and reorganisations in the public sector.

"It is clearly wrong when people leave public-sector roles with massive payoffs. It incenses the public when they see their hard-earned money used badly like this.

That's why we are capping exit payments to stop unacceptably large pay-outs for senior managers."

Former Chief Secretary to the Treasury, Liz Truss, announcing the consultation in April 2019.

What is the background to the consultation?

The proposal to restrict public-sector exit payments has been around for some time, with provision for the cap included in the Small Business, Enterprise and Employment Act 2015. There was a previous consultation on the cap in 2015, but the Government has made slow progress bringing it into force, presumably due to Brexit-related distractions and the complexity of the proposals.

The proposed £95,000 cap is in response to criticism from some quarters of six-figure sums paid to senior public servants on leaving their roles.

In April 2019, HM Treasury consulted on draft Regulations and draft guidance on the implementation of the exit pay restrictions.

It has now published its response to that consultation, over a year later, on 21 July 2020. It has also published new draft Regulations.

Which public bodies will be covered by the cap?

The public bodies that will be covered will be set out in a schedule to the Regulations. The bodies to be covered include:

  • local government, including fire authorities and maintained schools;
  • the NHS in England and Wales;
  • police forces;
  • the civil service, its executive agencies, non-ministerial departments and non-departmental public bodies; and
  • academy schools.

The Armed Forces, Secret Intelligence Service, Security Service and Government Communications Headquarters will be exempt, as will the Royal Bank of Scotland Group plc, NRAM Limited and Bradford & Bingley.

What kind of payments are covered?

Restricting exit payments in the public sector: key documents

Response to the Consultation

Draft Restriction of Public Sector Exit Payments Regulations 2020

Consultation on implementation of the Regulations

The cap will apply to most payments made on termination of employment, including:

  • redundancy pay (including voluntary redundancy);
  • payments made to prevent reduction of a pension on early retirement;
  • payments in lieu of notice (except where the payment does not exceed a quarter of the employee's salary);
  • severance payments and ex gratia payments;
  • compensation under a settlement agreement (although the cap will be waived for payments to settle whistleblowing, discrimination, unfair dismissal and health and safety detriment complaints);
  • compensation for the termination of a fixed-term contract; and
  • shares or share options.

Which payments are exempt from the restrictions?

The draft Regulations state that the cap does not cover payments that are made:

  • in respect of death in service;
  • in respect of incapacity as a result of accident, injury or illness;
  • in respect of injury to feelings;
  • under certain provisions of the Firefighters Pension Scheme;
  • in respect of accrued annual leave;
  • in compliance with an order of any court or tribunal;
  • in lieu of notice under the contract and do not exceed a quarter of the employee's salary.

Has the consultation response made any changes to the implementation of the cap?

The April 2019 consultation proposed implementing the cap in two stages, with the majority of public bodies being covered under the first stage, but more added in a second stage. The cap will now be applied to all public-sector bodies at the same time.

Payments in respect of injury to feelings will be excluded from the operation of the cap.

The mandatory waiver of the cap will be extended to cover settlement agreements arising from unfair dismissal and health and safety detriment claims.

How does the cap apply to pensions?

Accrued pension benefits and additional pension purchased by the employee will not be subject to the £95,000 cap, as these do not involve extra cost to the employer.

However the cap will cover pension strain payments, ie payments made by the employer when an employee retires early, to prevent them receiving a reduced pension. For example, under the current rules for the Local Government Pension Scheme, if an employee aged 55 or over is made redundant, their pension benefits are payable immediately, without any reduction for early retirement. This means that pension strain payments can be substantial.

The inclusion of these payments will therefore bring some public-sector employees who are not particularly high earners within the scope of the cap. Not everyone caught by the restrictions will be the senior managers that the Government is keen to be seen to target.

Commenting on concerns raised during the consultation over the inclusion of pension strain payments, the consultation response states: "The option of employer-funded early retirement is often the most costly element of an exit payment and is ultimately funded by the taxpayer so it is right that it is included."

Relaxation of the cap

The cap can be disapplied in some circumstances, but only by a Minister or the full council of a local authority.

Under directions issued by HM Treasury, it is mandatory to exercise this power, and relax the cap, where the exit payment arises as a result of TUPE, or the payment is compensation under a settlement or conciliation agreement arising from a whistleblowing, discrimination, unfair dismissal or health and safety detriment complaint.

The power to decide not to apply the cap is discretionary if:

  • the cap would cause undue hardship;
  • the cap would significantly inhibit workplace reform; or
  • the exit was agreed before the Regulations came into force, but was delayed for reasons outside the employee's control.

HR professionals working in the public sector may see the power to waive the cap where it would inhibit workplace reform as a welcome recognition of the importance of exit payments in facilitating reorganisations, particularly with a view to reducing expenditure in the long term. However, the discretionary power to relax the cap can be used only with the consent of HM Treasury and it seems unlikely that this will be easy to obtain.

The draft guidance issued by the Government with the 2019 consultation stated that a detailed business case for relaxing the cap in these circumstances will be required and that cases where this is appropriate will be exceptional.

What happens next?

The Government has not given a proposed date for the cap to come into force. It has said that it will publish updated guidance documents "at a later date".

The Restriction of Public Sector Exit Payments Regulations 2020 were laid before Parliament on 21 July 2020. To be brought into effect, the Regulations will have to go through the affirmative parliamentary procedure, which means they must be approved by both Houses of Parliament.

The cap is already in force in Scotland for exit payments made by devolved bodies.