HR Matters - The end of ‘fat cat’ public sector exit payments?...

Published: 25/05/2016

As the Chancellor made clear in the last budget, the ‘age of austerity’ is far from over and the public sector remains under the spotlight in an attempt to find further ways to restrain spending.

Among these measures are the Government’s proposals to cap the sum paid to employees exiting the public sector and to put mechanisms in place for exit payments to be repaid if the leaver returns to public sector employment.

These measures follow a number of high profile cases in the NHS and local government concerning employees who received large payments on termination only to return to the public sector almost immediately, leading to criticism of ‘revolving doors’.

Cap on exit payments
The Enterprise Act, containing the provisions for the public sector exit payment cap, was granted Royal Assent on 4 May 2016. The cap is due to come into force later in 2016 on a date to be announced, reportedly not before 1 October 2016.

What we do know is that the cap will initially be set at £95,000 and that it will apply to most elements of any exit payment, including:

  • payments in lieu of notice
  • payments to reduce or eliminate an actuarial reduction to a pension on early retirement
  • voluntary or compulsory redundancy
  • ‘special severance’ payments such as those agreed in settlement of threatened litigation (this definition is likely to encompass most sums set out in settlement agreements).
What is the likely impact of the cap?
One of the aims of the cap is to address the public perception that public money is often ‘wasted’ when so-called public sector ‘fat-cats’ receive large pay-outs. In some cases this may be a genuine issue, but there is a murmur of concern among Unions that a cap set at this level will capture much lower earners who have given the public sector long periods of valuable service. Matt Dykes, a senior policy officer for the TUC, expressed this view succinctly, calling the capped figure “a penalty for long service not high pay.”

At first glance, it might seem that such concerns are exaggerated. However, many public bodies have a contractual requirement to make payments into the relevant public sector pension scheme to enable an employee to receive unreduced pension benefits upon termination of their employment due to, for example, early retirement upon being made redundant. Given the high costs of ensuring that pensions remain unabated, you can start to see how the £95k cap can easily be exceeded and not just for the top-earning employees.

A significant impact of these measures will be that the costs of a redundancy or restructuring exercise are likely to be reduced. It might also mean, however, that because it will not be possible to negotiate termination pay-outs at the ‘top end’ there will be a knock-on impact on how redundancy exercises are shaped overall.

Clawing back exit payments
The double-whammy for the exiting public sector employee is that new rules are also planned to allow the recovery of some or all of a ‘qualifying exit payment’ made to those who return to any part of the public sector within a 12 month period. The rules (which, at the time of writing remain to be finalised) will apply to individuals earning £80,000 or more.

The rules were originally expected to be in place from April 2016 but at the time of going to press, the implementation date has not been announced.

What might the unintended consequence be?
The combined impact of the statutory cap and repayment provisions may be to drive talented employees out of the public sector ahead of the imposition of the cap. While reduced exit payments obviously constitute a cash saving, a diversion of talent to the private sector and a loss of skills and investment may be an unfortunate unintended consequence.

The content of this article is for general information only. For further information regarding public sector exit payments, please contact Sonya O'Reilly. Law covered as at May 2016.

This article is taken from our HR Matters Summer 2016 publication. Similar articles can be found in the latest edition.

People Finder