Note on HM Treasury Consultation on Public Sector Exit Cap + NUT response
In August 2015, HM Treasury conducted a consultation on introducing a £95,000limit on public sector exit payments.
The Government has subsequently confirmed that it intends to legislate to introduce a cap on exit payments at £95,000 in the Enterprise Bill. The Government has conceded that it would be counter-productive to include payments for untaken annual leave within the cap – so this has been removed.
The £95,000 cap would cover the following payment types:
- Payments related to voluntary and compulsory redundancies
- Special severance payments and ex gratia payments related to exit from employment
- Payments or compensation in lieu of notice (PILON payments)
- The cost to the employer of offering early access to unreduced pensions in place of, or in combination with, other exit payments
It is important to note that the cap does not include standard pension lump sum payments outside of the cost of buying-out the actuarial reduction (or adding extra years) in premature retirement cases.
Pay, Conditions and Bargaining Section
October 2015
27 August 2015
HM Treasury Consultation - Public Sector Exit Payment Cap
Response by the National Union of Teachers
The National Union of Teachers is the largest teachers’ union, representing almost 300,000 serving teachers in England and Wales.
Summary of NUT response
The NUT opposes the proposals, in particular on the basis that:
- the proposals are unnecessary, in respect of teachers in any case, given the limits contained in existing regulations;
- the consultative document misrepresents the position on use of redundancy and exit payments, in particular the comparative position of the public and private sectors; and
- there is no adequate impact assessment of the proposals, which appear likely to fall disproportionately on older workers and in particular on older women workers.
The NUT also believes, in relation to specific aspects of the proposals, that:
- payments in respect of accrued annual leave and/or in lieu of notice should not be included; and
- the cost of premature retirements should not be included, as its inclusion would disrupt recently-agreed changes to public sector pension schemes and would unnecessarily affect many employees who are neither senior not highly paid.
Cost of redundancy payments
The Government acknowledges in the consultation paper that “exit payments have helped unlock substantial reductions in staff costs in the medium to longer term”. They also serve an obvious further purpose in helping achieve change efficiently and by mutual agreement in a range of situations. The consultation paper also notes that separate arrangements have already been made for situations where individuals who have received large exit payments then return to public sector roles.
There are already provisions in regulations on teachers’ redundancy and premature retirement which impose a cap on redundancy payments, as well as provisions in teachers’ pension regulations which prevent attempts to boost pension entitlement through pay increases immediately prior to termination of employment.
The NUT believes that these measures place an appropriate upper limit on exit payments. Few, if any, cases have come before us involving exit payments in teaching in excess of £95,000. In the absence of any impact assessment providing concrete examples of situations in teaching which support a case for change, the NUT does not endorse the proposals.
Comparative position of the public and private sectors
The NUT disputes the assertion that “while some larger private sector employers offer formal redundancy schemes or exit payments comparable with the public sector, many employers offer only statutory redundancy pay.”
In fact, many medium size companies in the UK - which the EU defines as companies with between 50 and 250 employees – encourage voluntary redundancy by offering enhanced redundancy packages to employees. This is acknowledged by many businesses as an effective way of avoiding compulsory redundancies and their associated costs.
Furthermore, while the consultation papers states that in 2013-14, the average cost of exiting a member of staff in the public sector was £25,000, we are not informed of the comparable cost in the private sector. In the absence of appropriate comparisons with the private sector, it is meaningless to draw attention to the overall cost of redundancy payments in the public sector (at para 3.3) and to imply that public sector employees get a better deal than private sector employees. It is deliberately misleading to imply that such costs are met by the tax payer only in relation to public sector workers. The private sector passes on the human as well as the financial cost of redundancies to tax payers as well.
Impact on older workers and in particular older women workers
It is unlikely to be disputed that older people bear a greater proportion of redundancies than people aged under 35. A cap on exit payments and, in particular, on funding for early access to unreduced pensions, is likely to have a disproportionate impact on older public sector employees and, given the nature of the workforce, possibly on older women workers in particular. The consultation paper is not accompanied by any detailed equality impact assessment. It is therefore unclear whether the Government has taken proper account of the likely impact of its proposals on older workers and on older women workers in particular.
Paid annual leave and payments in lieu of contractual notice
Exit payments are defined in para 3.1 as “any financial or non-financial transfer to an employee from the employer which does not represent remuneration for normal ongoing activities that are part of their employment.”
The NUT does not believe that “additional paid annual leave at the end of an individual’s employment” should fall within this definition. It goes without saying that annual leave accrued during an employee’s period of employment is a benefit arising from “normal ongoing activities that are part of” the employee’s employment. The only difference is that on termination of employment the employee receives his entitlement as a cash sum because he cannot take it as annual leave.
The NUT also rejects the inclusion of “payment in lieu of notice” (PILON) within this definition. PILON, although a cost to the employer arising solely out of termination of the employee’s employment, is not truly an additional cost of the kind focused on in the consultation document, since the employee is entitled to be paid this sum where the contract is terminated at the end of a notice period. PILON is not a payment which the employer is under an obligation to make, since the employer has discretion to insist that the employee work the notice period. There seems to be no reason in policy, however, to create a situation where employers are discouraged from offering PILON as part of a mutually agreeable termination without notice or, where a PILON clause happens to exist in the employment contract, where employees are penalised financially by that fact.
Early Access to unreduced pensions
The consultation document states the following:
“The Government’s intention is that this policy will apply equally to early access to pension for local government workers. Unlike other public service pension schemes, the LGPS sets out an entitlement to an unreduced pension for employees aged over 55 who leave employment in certain circumstances… The Government therefore intends that the employer cost of funding early access to unreduced pensions in the LGPS is within scope of the exit payments cap.”
The inclusion of pension benefits, which have a high notional value but are payable over a long period of time, is inappropriate. In practice, as well as setting aside some very recent agreements (including with Government) on the future operation of public sector pension schemes, their inclusion would mean the extension of the cap to many employees who are not highly paid.
The NUT has members in the LGPS who would be affected by this proposal. The NUT rejects the proposal, which would set aside arrangements put in place only recently as part of the agreement on the future of the Local Government Pension Scheme.
The Teachers’ Pension Scheme has similar arrangements, although not as an entitlement, for early access to pension or “premature retirement compensation” (PRC). Although the TPS is not specifically mentioned in the consultation document, we understand that the DfE’s working assumption is that the TPS would be within scope of the proposal. Again, this would set aside arrangements put in place only recently by the Government (and in agreement with several teaching unions, even if not with the NUT).
Putting those objections of principle to one side, however, there is also the fact that the proposed cap would, given the value of pension benefits, apply to employees who are not higher paid members of the TPS. The lack of examples in the consultation document suggests that this impact may not be understood by the Government. The example below illustrates the point.
Example -
An unpromoted teacher who is a “protected member” of the pre 2015 final salary scheme, paid on the maximum of Upper Pay Range (Inner London) at an annual salary of £45,905, and aged 55 with 30 years’ reckonable service.
Unreduced pension =
£45,905 * 30/80 = £17,214 + £51,643 lump sum
Actual pension =
£17,214 * 0.796 (ARB factor at age 55) = £13,702 + £41,107 lump sum
Cost of premature retirement:
((Unreduced pension – ARB pension) * PRC factor) + (Unreduced lump sum - ARB lump sum)
Cost of premature retirement =
(£17,214 - £13,702) * 21.6 (PRC factor for age 55) = £3,512 * 21.6 = £75859
Cost of reduced lump sum =
£51,643 - £41,107 = £10,536
Total cost = £75,859 + £10,536 = £86,395
When a statutory redundancy payment of £12,825 is added (and contractual redundancy payments are often higher), this will then exceed the proposed £95,000 cap. DfE statistics show that the average premature retirement in 2014-15 involved a £15,808 pension on a £49,785 salary so this example appears typical rather than exceptional.
National Union of Teachers
August 2015