30 Jul 2020

The Government has been considering a cap of £95,000 on public sector exit payments since 2015. We have had no news on this for over a year since HM Treasury launched a consultation on draft Regulations in April 2019. However, the Treasury has published its response to that consultation and we are now much closer to a cap being implemented.

With around 600 responses from a range of bodies, there was an unusually high level of interest in the consultation, which may explain why it has taken the Government over a year to respond.

Unfortunately we are still short on detail as to how the cap will apply, as updated draft Regulations – which will include a list of the public sector bodies that are in scope - and updated guidance documents have not yet been published. Neither is there any indication as to when the cap will come into force, making it difficult for organisations to plan.

Update

Amended draft Regulations have now been laid before Parliament, together with an explanatory memorandum. The key points to note are:

  • The Regulations will come into force 21 days after being made so employers will not have much notice of the cap coming into force. They will have to be approved by both the House of Commons and the House of Lords before they can be signed by a Minister and come into force. Parliament is now in recess until 1 September; theoretically this means that the Regulations could be approved on 1 September and be in force as early as 22 September. Employers therefore need to start planning now for the cap
  • The draft Regulations include a full list of the public sector bodies that will be covered
  • The previous draft of the Regulations stated that any payment made in excess of the cap would be unenforceable. This meant that contractual terms giving employees the right to a payment higher than the cap did not need to be amended. That wording has been removed from the latest draft so employers will need to consider whether any changes need to be made to documents such as contracts of employment, redundancy policies and collective agreements to reflect the introduction of the cap. (In its response to the consultation, the Government stated that it expected employers to amend such documents.) Bearing in mind that this may require consultation with unions and/or individuals, employers need to act now and consider what they will do if agreement cannot be reached
  • HM Treasury will publish updated guidance for applying the exit payment cap when the Regulations come into force. This will give detailed information on how to apply the cap and the waiver provisions. We expect that finalised Treasury directions (setting out how the waiver system will work) will be published then as well. It is unfortunate that these documents will not be available sooner.

Outcome of the consultation

The response to the consultation clarifies a number of areas:

  • The cap will apply to the aggregate sum of payments made in consequence of termination of employment, including the cost of employer-funded early retirement. The relevant payments will stay the same as those that were set out in the draft Regulations published last year. Broadly, this includes redundancy lump sums, pension top-up payments and pension strain payments, payments made under settlement agreements or COT3 agreements, severance and ex gratia payments, and payments in lieu of notice that exceed a quarter of the employee's salary
  • Exempt payments (which include payments in respect of death in service, incapacity due to illness or injury, accrued pension rights and accrued holiday) will be extended to include payments made in respect of injury to feelings. This may well end up with debates during termination negotiations as to what value can realistically be allocated to injury to feelings in cases where allegations of discrimination have been made
  • The cap will not be implemented in two stages as planned previously but will apply to the whole of the public sector as soon as it is implemented.
  • The Armed Forces, the Secret Intelligence Service, the Security Service and GCHQ will be exempt, as will Royal Bank of Scotland Group plc, NRAM Ltd, and Bradford & Bingley
  • The schedule listing the bodies that are in scope will be kept under review and amended from time to time (for example in the event of the creation of new public bodies)
  • The Government expects that pension schemes, employment contracts and compensation schemes will be amended to reflect the cap. However, it seems likely that employers will need to consult with their employees and unions on such changes and may face some resistance
  • A waiver process will be introduced to relax the cap, which will include mandatory and discretionary waivers. Full details will be given in the updated guidance
  • The level of the cap will be kept under review and can be changed by statutory instrument.

Further documents

The Government will publish updated versions of these documents before the Regulations come into force:

  • Updated Regulations, including a schedule listing the organisations that are covered
  • Guidance documents
  • Directions regarding mandatory and discretionary waivers

Until these documents are available, it is hard to know what impact they will have and how organisations can start to prepare for the new restriction. Public sector employers (and their lawyers) will be particularly concerned about how the waiver system will work, how it will interact with the current requirement to obtain Treasury approval in some cases and whether it will make it more difficult and slower to settle claims. They will also need to consider how to approach employees and unions in relation to contractual and other changes.

Other developments

The Scottish Government has already introduced a similar cap on exit payments made by devolved bodies by updating the Scottish Public Finance Manual in September last year.

Separate Regulations will be taken forward relating to the repayment of exit payments when a senior public sector employee returns to the public sector after receiving an exit payment. Again, there is no timescale given for this.