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Insight

Government gives green light to public sector exit payment reforms

26/10/2016
Just under a year ago, we updated you on the Government's proposed £95,000 public sector exit payment cap. At the beginning of the month, HM treasury responded to the consultation on reforms to public sector exit payments, which closed in May 2016. These reforms are set to affect the NHS, civil service, police, teachers and armed forces, amongst others.

Just under a year ago, we updated you on the Government's proposed £95,000 public sector exit payment cap. At the beginning of the month, HM treasury responded to the consultation on reforms to public sector exit payments, which closed in May 2016. These reforms are set to affect the NHS, civil service, police, teachers and armed forces, amongst others.

Despite most of the consultation's responses opposing the planned reforms, the Government has been persuaded by the potential £250m savings per year, to align public sector exit terms with the private sector. Opposition stemmed, in part, from public sector exit payments historically having been set by collective agreement, to balance the needs of employers and employees in the workforce. 

The Government has apparently "not seen evidence" to change its view that an upper limit across different elements used to calculate exit terms in the public sector would make such exits "fairer, more modern and more consistent". It would therefore like to see agreement from different Government departments on reforms appropriate to each workforce within a centrally-set framework.

What could the reforms look like? In addition to the potential £95,000 cap on public sector exit payments and 'clawback' of redundancy compensation, when highly-paid individuals return to the public sector shortly after receiving exit payments, suggested reforms include:

  • A maximum tariff for calculating exit payments of three weeks' pay per year of service.

  • A ceiling of 15 months' salary on all redundancy payments.

  • A maximum salary for calculating exit payments, for example; £80,000 (the existing NHS scheme salary limit).

  • A taper on the lump sum compensation an individual can receive as they approach the normal pension age or pension retirement age.

  • A reduction in employer-funded pension top-up payments, for example; capping the amount of employer-funded top ups for early retirement, removing access to them and/or increasing the minimum age at which employees can receive employer-funded pension top ups.

The Government has hinted that it may allow transitional arrangements to honour exits which have already been agreed when these reforms hit. It now plans to start its work immediately and has announced that, if meaningful reform cannot be achieved in one or more workforces, it will consider primary legislation to take this forward.

If you would like to discuss how best to structure your organisation's severance packages in light of these reforms, please do not hesitate to contact a member of our Employment and Pensions team.

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