Consultation outcome

Recovery of public sector exit payments

Updated 24 February 2016

0.1 Foreword

Redundancy pay has played a vital role in supporting reforms under this government. For those employees who have voluntarily or otherwise left public service, it has helped support them while they find new work. Alongside this, pay restraint has helped reduce the total number of job losses in the public sector, protecting vital public services particularly in the health service and education. These reforms and savings are a vital part of the government’s work to ensure the nation’s finances are returned to health, which is supporting the economic recovery.

In this context, it is entirely unacceptable that highly paid public sector workers should be able to receive a generous redundancy package and then shortly return to work in the same part of the public sector. Across five million public sector workers, the number of instances of this is occurring is relatively small. However, it remains unfair and a poor use of public money.

The measures outlined in this document will put a stop to this practice right across the public sector. They apply to high paid staff only and will underpin rather than replace measures being taken forward by individual employers, who may have chosen to go further. Of course in most cases employers will seek to offer alternative employment before making an individual redundant.

Subject to a very small number of exceptions, the intention is to apply these rules to the widest possible range of public bodies including local government, independent arms length bodies and companies owned by the government. The government believes this is necessary to ensure fairness across all public sector employers. Decisions over redundancy pay and other aspects of pay policy for the vast majority of employees would rightly remain a matter for individual employers.

Public sector workers play a crucial role in delivering services that are both essential for the country and support our economy. This includes those at senior executive or professional levels who are higher earners. Where the minority of these staff leave and shortly rejoin, these measures will ensure greater fairness with respect to other workers and for the tax payer.

Rt Hon Danny Alexander MP

Chief Secretary to the Treasury

1. Introduction

1.1 Policy background

For any organisation, payments associated with loss of employment including redundancy pay are essential in their ability to reform and react to new circumstances. They facilitate reorganisation and reform while providing support for employees that helps bridge the gap to new employment.

In the public sector exit payments are unlocking substantial reductions in costs and playing a crucial role in meeting the challenge of reducing the fiscal deficit. In the Civil Service redundancies following the reforms of the compensation scheme in 2010 are estimated to have saved the tax payer £400 million per year in reduced staffing costs1. In the NHS redundancy has enabled the removal of unnecessary management roles so that new job opportunities can be created and front line services protected.

As well as helping employers implement wider reforms, at an individual level exit payments should be fair, proportionate and represent value for money to the tax payer. A number of public sector employers have recently taken forward, or are proposing reforms to further ensure this, most significantly the Civil Service Compensation Scheme which was radically reformed in 2010.

A key area in this regard is the issue of re-employment following redundancy. Employers will normally make every effort to find alternative employment for employees where their services are no longer required. However, the size and diversity of the public sector means that it is not uncommon for individuals made redundant from one employer to then find employment elsewhere in the same part of the public sector.

In a number of workforces, arrangements exist to recover exit payments where an employee returns after a short period. However, such provisions are not currently universal and there have been a number of recent high profile cases of individuals who have received large payments and quickly returned to public sector roles – including in the NHS where the Health Select Committee found among 19,000 redundancies, 17% had been rehired and most within a year2; and local government, where an audit commission report in 2010 found that of 37 chief executives who left by mutual agreement over a two year period from January 2007, six had been employed in another council within 12 months. In such circumstances, the justification of financial support to bridge the gap to new employment is undermined and this represents poor value for money.

In line with other decisions on financial management and pay policy it is the responsibility of individual employers and departments to ensure that their exit payment arrangements are fair and represent value for money for the tax payer. However, for the highest earning individuals moving between employers in same part of the public sector, it is right for the government to examine whether there is sufficient assurance to the tax payer that exit payment arrangements are fair and represent value for money.

This consultation examines existing arrangements for recovering exit payments in the public sector. It looks at the case for national rules to underpin individual employers’ policy and provide additional reassurance to the tax payer, in particular with respect to higher earning employees.

1.2 Policy intention

The government is considering establishing nationally determined rules requiring high paid employees that leave and re-join the same part of the public sector within a year to return some or all of any exit payments that they have received.

These proposals would be taken forward in primary legislation as part of the Small Business Enterprise and Employment Bill with the measures being implemented no later than April 2016, with the final deadline to be decided following consultation.

The government will introduce the Small Business Enterprise and Employment Bill with clauses containing a broad framework power. That has been designed to give effect to the government’s policy proposal. However, the government is prepared to amend or refine these clauses to accommodate any changes that are necessary following the outcome of consultation.

The intention is to apply these measures to the public sector in the widest sense; therefore the government is interested in gathering information on exit payment arrangements in a wide variety of public sector settings to assist in the design of the policy.

1.3 Aim of the consultation

Based on the responses provided, the government will decide on how best to achieve its aims in relation to the proposals set out in this document.

We are particularly interested in hearing from:

  • bodies within the scope of this policy
  • public sector employers and their representative bodies
  • employees and their representative bodies
  • members of the academic community with expertise in this area
  • pay, pension, remuneration and HR professionals in both the private and public sectors
  • anyone else who may be impacted by this consultation

1.4 Scope of the consultation

This consultation is particularly focussed on examining the issue of exit and reemployment. It does not seek to evaluate the overall policy landscape on exit arrangements, individual payments, or the overall level of public spending in this area. However, the government would expect any changes brought about as part of this consultation to support existing or ongoing changes to exit payment arrangements to ensure they are fair and promote value for money more widely.

1.5 Structure of the document

The remainder of this consultation document is organised as follows: Chapter 2 describes existing exit payment arrangements in the public sector; Chapter 3 evaluates these arrangements; Chapter 4 sets out the government’s proposals; and Chapter 5 provides an impact assessment for the proposals.

2. Exit payments in the public sector

Exit payments are payments made to an employee or office holder by their employer on leaving the organisation. This section sets out the purpose, definitions and terms around such payments which are then used throughout the rest of the document. It then explains existing arrangements in the main public sector workforces. In this document the public sector is defined in a wide sense according to the Office of National Statistics definition, the most recently published list of bodies meeting this definition is available on the ONS website3.

2.1 Definitions and terms

The term compensation payment is used here to refer to 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. This excludes for example: wages, salaries, allowances, regular non-financial benefits packages such as a company car, or employer pension contributions.

The government is primarily interested in compensation payments which are made on termination of employment, redundancy, or unplanned loss of employment or loss of office. Such payments are sometimes referred to as staff exit payments and serve to achieve the following:

  • supporting reform and reorganisation of the public sector – facilitating at all levels, from top to bottom, organisational restructuring, downsizing and preparations for fundamental change in the provision of services
  • support individuals made redundant while they find new employment – providing individuals with financial support that reflects their length of service to their employer and helping bridge the gap to new employment
  • compensate for loss of expected earnings or to counter any legal claims – for example where there is a disagreement in the processes by which the individual was managed either before or during the exit
  • facilitate the departure of individual staff able to perform at levels that may be adequate in some circumstances but no longer meet the organisation’s direction or needs

In doing the above, exit payments should provide value for money, be set at a level commensurate with the expected benefit to the organisation of exiting the individual, satisfy the employees’ statutory entitlements under the Employment Acts; avoid or minimise claims for unfair dismissal or breach of contract; and have regard to the value of past service to the employer. Payments are also made by employers in relation to injury, ill-health or death during employment; these are not in scope of this consultation.

Exit payments may take a number of forms including:

  • cash lump sum – such as a redundancy payment which is normally calculated on the basis of salary at the point of exiting the organisation and length of service
  • early access to unreduced pension – for employees close to the relevant pension scheme’s normal pension age some employers offer the option to take early retirement on a pension with the reduced amount for early payment being met by the employer, or otherwise enhanced, in place of or in addition to a cash lump sum compensation payment
  • non-financial and other benefits – in a smaller number of instances, employers may offer other benefits such as additional paid annual leave at the end of an individual’s employment

Due to their related nature, the government is also interested in what are termed special severance payments, special payments or ex-gratia payments where are another form of exit payment. Such payments are generally defined as a payment made to the employee outside their basic statutory or contractual entitlement, upon unplanned termination of their employment contract. They may be paid where an employee is dismissed, or agrees the termination of their contract in a settlement agreement (a legally binding contract, used either to settle statutory disputes or claims, or disputes or claims under an individual employment contract). Special severance payments may also be paid in order to settle current legal proceedings such as an Employment Tribunal claim.

2.2 Context

The Whole of government Accounts show the total costs of exit payments in the public sector and the associated number of staff in receipt of these payments. Table 2A shows that the total value of exit payments was £2 billion across the public sector in 2012-13.

In the Civil Service by 2012 the government spent £600 million on redundancy payments following the reforms to the Civil Service Compensation Scheme in 2010. Independent work by the National Audit Office estimates that under the reformed terms of the scheme this will produce savings of £400 million per year, significantly exceeding the cost of the redundancy payments and contributing to overall reductions in spending required to reduce the deficit.

In other workforces such as the health service, local government, criminal justice system, the Armed Forces and education, exit packages have played an important role in facilitating reforms to improve how public services are delivered while ensuring government commitments to protect spending on front line services are met. In the NHS the cost of staff redundancies as part of the NHS modernisation up to the end of March 2013 was £435 million. However, the NHS is set to save £5.5 billion this Parliament and £1.5 billion each year thereafter, reducing unnecessary bureaucracy and freeing up extra resources for patient care.

Cost of staff exits in the public sector in 2012-13

Exit costs Number of compulsory exits Other departures Total exit packages Total cost (£bn)
Local government, Fire and LA maintained schools 10,616 27,189 37,805 0.7
Central government 8,463 23,656 32,119 1.2
Public Corporations 97 2,265 2,362 0.1
Total 19,176 53,110 72,286 2.0
Source: Whole of government Accounts 2012-13

2.3 Exit payment arrangements by workforce

There are a wide range of exit payment arrangements in the public sector. These include formal redundancy schemes, usually closely linked to pension scheme provisions; discretionary powers to make ad hoc exit payments or time limited schemes; and provisions for making exit payments that are left entirely to individual employers to determine. In addition, individual contractual arrangements may operate at a local level which are in addition, or outside of, the kinds of arrangements listed above. The following sections provide detail on exit payment arrangements in the main parts of the public sector only.

Civil Service

The Civil Service Compensation Scheme (CSCS) is a formal scheme applying to all organisations that are members of the Civil Service Pension Scheme. Upon taking up office in 2010 the government quickly moved to reform the CSCS. The unreformed arrangements included several options but at their most generous allowed for lump sum payments of up to three time annual salary or, for those aged 50 or more, an enhancement to pensionable service of over six years and immediate payment of unreduced pension together with a lump sum payment of up to six months’ pay. These terms sometimes encouraged staff to wait to be made redundant as that could offer better terms.

The reforms of 2010 reduced the maximum payment to 21 months’ salary with 3 months notice of redundancy, imposed a cap of six times average private sector earnings on the salary used to calculate the redundancy payment (currently this totals slightly under £150,000) in any individual case, removed the facility for employers to provide extra years of pensionable service and introduced a requirement to repay at least part of the compensation if re-employed within six months. The scheme was also structured so as to incentivise voluntary, early, application by staff, by putting in place arrangements for compulsory redundancy which are much less generous, and to protect the lower paid through the use of a salary underpin (set at 90% of average private sector earnings or £23,000 at present).

National Health Service

The NHS also operates a contractual redundancy compensation scheme with terms collectively agreed with the NHS trade unions at the NHS Staff Council. This was last reformed in 2006. The scheme offers one month’s pay per year of service up to a maximum of 24 months. It also includes an option for individuals to take early retirement on unreduced pension if over 50. The existing NHS scheme does not have a cap or floor for redundancy pay. The NHS Staff Council have commenced discussions over possible changes to the scheme, including the introduction of a floor and a cap on the salary used to calculate the redundancy payment, and the removal of employer pension top up provisions.

These arrangements do not cover private GP practices or other private sector organisations providing NHS services, which are able to set their own exit compensation terms for their employees. However where these employees have been transferred from public sector employment they may retain some or all of their previous public sector compensation terms. National talks on redundancy reform have been suspended by the trade unions in response to the recent NHS pay deal.

NHS organisations can run mutually agreed resignation schemes (MARS). A MARS is a form of voluntary severance and has been developed with the aim of increasing the flexibility to organisations as they address periods of change and service redesign, in light of the financial circumstances in which they operate. Vacancies left by employees who leave under MARS can be filled by those who are at risk of redundancy and do not want to be made redundant MARS payment rates are typically considerably less than contractual redundancy terms and include a 6 month recovery provision.

Education

The last national change to compensation arrangements for teachers was in 1997. All teachers employed in publically funded schools (maintained schools and academies) are entitled to statutory redundancy pay. Local authorities, the employers of teachers in maintained schools are also able to offer compensation based on locally determined enhancements to statutory redundancy pay. These enhancements can include offering two or three weeks’ pay per year’s service depending on individual characteristics and up to a maximum of 104 weeks, although many local authorities have set the maxima at a lower level. The compensation payments are based on all of the teacher’s continuous teaching service (and other continuous service with various public sector employers including local authorities) and not just service with their current employer.

All members of the Teachers’ Pension Scheme are also eligible to have the actuarial reductions to pensions paid before the person’s normal pension age ‘bought out’ by their employer, so that individuals are able to take early retirement on unreduced pension. However the decision on whether to offer this buyout lies with employer who has total discretion in the matter. Although rarely used now, local authorities and academy employers can also offer the possibility of up to 10 additional years of pensionable service.

Academy schools are able to determine their own redundancy arrangements, although under TUPE provisions many teaching staff working in academies benefit from the contractual terms inherited from the predecessor local authority employer.

Redundancy pay arrangements for support staff employed to work in schools and academies are similar to those for teachers, although support staff are eligible for membership of the Local government Pension Scheme (LGPS) and may have entitlements to scheme payments which are explained below.

Local government and Fire

Councils determine their local redundancy policies within a framework set by regulation, which was last reformed in 2006. Councils may uplift statutory payments by using actual salaries and offer lump sum compensation. The regulations limit the total lump sum compensation awarded to any individual, including any statutory redundancy pay under the Employment Rights Act 1996, any uplift and any lump sum to the equivalent of 104 weeks’ pay.

The regulatory framework for redundancy payments in local government is linked to the pension scheme and compensation may only be awarded to employees entitled to be members of the LGPS. Employees aged 55 or more may be entitled to immediate payments of unreduced accrued LGPS pension rights. There are additional discretions elsewhere in the LGPS to award a period of added membership or amount of added pension in the event of redundancy but these awards must not be made in addition to any enhanced redundancy compensation.

There is currently no standing provision for fire fighters to be awarded compensation in the event of redundancy above statutory entitlements. Authorities have discretion to award fire fighters who are members of the New Firefighter Pension Scheme 2006 and 55 or over, payment of unreduced pension benefits in the event of employer initiated early retirement.

Police

Voluntary redundancy arrangements in the police are similar to the Civil Service, with officers eligible for one month’s pay per year of service up to maximum of 21 months (6 months if above pension age). Payments are recovered from officers who return to work in police within six months. Compulsory redundancy arrangements do not exist in the police. However, officers that have reached their normal pension age and are entitled to take an unreduced pension can be required to retire.

Armed Forces

The Armed Forces have two redundancy compensation schemes which are linked to the two main Regular Armed Forces Pension Schemes. In light of the forthcoming move to Armed Forces Pension Scheme 2015, the Ministry of Defence has already begun to reform the current Redundancy Schemes.

In the main, compensation is calculated as a function of the length of service and the final pensionable earnings of the Service person. However, in some circumstances, compensation also takes into account the unexpired portion of service remaining.

The Armed Forces Pension Schemes include an Early Departure Payment (EDP)/Immediate Pension that is specifically designed to draw personnel through to around age 40 (the exact parameters vary with the scheme) and then encourage them to leave the Services. This tool enables the Armed Forces to maintain their manning structures which require a young workforce. The EDP and its equivalents within the Armed Forces Pension Schemes are outwith the scope of this review. Service personnel who have qualified for an EDP (or its equivalent) receive much smaller compensation as a result if they are then made redundant.

The maximum possible payment for members of the 2005 Armed Forces Pension Scheme is 27 months pay if the person leaves before the EDP point, and 6-12 months if leaving with an EDP. For members of the AFPS 1975 the compensation payments are less than the AFPS 05 Scheme as the AFPS 75 pension scheme is more generous. Compensation payments to Armed Forces personnel for early exit are exempt from tax.

Ministers, Members of Parliament and Special Advisers

Generally, a lump sum, equivalent to three months of annual ministerial salary, is payable when a minister ceases to hold office. Full details are set out in section 4 of the Ministerial and other Pensions and Salaries Act 1991. Ministers do not receive severance payments if they return to Ministerial office within 3 weeks. It is the intention that Ministers severance pay will come within the scope of this policy and legislation.

The resettlement and severance arrangements for Members of Parliament are the responsibility of the Independent Parliamentary Standards Authority (IPSA). Recently announced reforms to these arrangements included the removal of generous “resettlement payments” and the introduction of more modest redundancy packages available only to those who contest their seat and lose.

If special advisers resign they are entitled to 3 months pay for the first year of service plus 1 month per year after the first to a max of 6 months. Special Advisers are required to repay any severance pay on reappointment above that which they would have earned if they had been continuously employed.

Special severance payments

The Treasury approves all special severance payments for bodies covered by ‘Managing Public Money’ guidance, which includes the Civil Service and arms length bodies and the NHS. In the wider public sector, for employers such as Local Education Authorities, other Local Authority employers, and Police Authorities, exit compensation payments are generally decided at local level. However, this is often subject to guidance on their reporting.

For example, in local government special severance payments are subject to three reporting conditions: a requirement by legislation to report details of payments connected to termination of employment for senior employees in their accounts; a CIPFA Code of Practice requirement to disclose the number of exit packages agreed in the year (above £20,000); a requirement to have regard in annual pay policy statements to policy on severance for chief officers; and an expectation that Full Council should have the opportunity to vote on severance packages over £100k.

Statutory Redundancy pay

Statutory redundancy pay applies across the wider economy and some public sector workers. It sets the legal lower minimum that employers must pay employees on making them redundant. Employees are normally entitled to statutory redundancy pay if they have been working for their current employer for 2 years or more.

Under statutory terms employees are entitled to half a week’s pay for each full year they were aged under 22, one week’s pay for each full year they were 22 or older, but under 41, and one and half week’s pay for each full year they were 41 or older. Where an employee is offered suitable alternative employment before their termination date which starts within 4 weeks of that date they are not entitled to a statutory redundancy payment.

Employees are not entitled to statutory redundancy pay if they fall into one or more of the following categories: merchant seamen, former registered dock workers (covered by other arrangements) or share fishermen, crown servants including civil servants, members of the armed forces or police services (for whom separate arrangements exist, explained above), apprentices who are not employees at the end of their training, or a domestic servant who is a member of the employer’s immediate family.

Question 1

Are there additional exit payment arrangements in the public sector not captured in this section which the government should be aware of? If so please provide information and examples.

3. Existing recovery arrangements

This section outlines existing arrangements for the recovery of exit payments on reemployment, assesses the evidence around instances of rehiring shortly after an exit package has been made, and puts forward the government’s assessment of these in terms of fairness and value for money.

3.1 Existing policy

Public sector employers will generally seek to find new work for existing employees when services are reformed before using redundancy. Where employees are rehired following redundancy provisions exist in some workforces to require repayment of some or all of any exit package. These arrangements are more common where a formal compensation scheme exists such as the Civil Service, NHS and Armed Forces.

In the Civil Service Compensation Scheme, employees who return to another part of the Civil Service within six months are required to repay any redundancy lump sum payments on a pro rata basis, allowing for the period outside civil service employment and the overall value of the lump sum. Those who have left with early retirement pensions are subject to an abatement test that limits overall earnings on re-employment plus pension to the equivalent level of pensionable earnings around the time of exit.

In the NHS, it is a contractual requirement that an employee cannot refuse to apply for or refuse to accept suitable alternative employment with either their own or another NHS employer. If they do they are not entitled to a redundancy payment. The vast majority of NHS vacancies are advertised on NHS Jobs the NHS portal used by NHS employers to advertise their vacancies free of charge. During the recent reforms NHS Jobs supported regional re-deployment pools where staff at risk of redundancy had preferential access to vacancies. The NHS does not currently operate a system for recovering payments on re-employment beyond a period of 28 days. However, proposals have been put forward as part of wider discussions on compensation arrangements described in the previous chapter.

In the Armed Forces Service personnel are required to repay all or part of their redundancy compensation if they are rejoining the Armed Forces into Regular Service, Full Time Reserve Service or take up an Additional Duties Commitment. The amount of repayment will depend on the length of the break in service. This requirement does not apply to those who rejoin the Armed Forces as Part Time Volunteer Reserves.

In the wider public sector where pay and reward policy is taken forward at a more local level such as local government recovery, provisions are less common or less consistently applied. However, some have gone further for example in the BBC where any employee made redundant is not eligible to return to employment with the organisation before 12 months. Provisions rarely exist for recovering payments from employees moving between different types of employer, for example an NHS worker joining the Department for Health.

Question 2

What other recovery provisions are you aware of in the public sector that the government should be aware of?

Instances of rehiring shortly after redundancy

There is limited information on the movement of employees across different public services and on their re-employment within the same public service after leaving with an exit payment. However some recent high profile cases provide examples of where the existing system is leading to unfair outcomes and not providing value for money.

In the NHS, notwithstanding existing policy provisions, from 2010/11 to 2012/13 the Health Select Committee established that among 19,000 redundancies of NHS staff, 17% had been rehired by the NHS and most within a year2. In local government, an audit commission report in 2010 found that of 37 chief executives who left by mutual agreement between January 2007 and September 2009, six (16%) had been employed in another council within 12 months.

Consideration of the distribution of size of payments across the public sector provides further indication of the potential for larger payments to be made and not recovered should a portion of these employees be rehired. Table 3A shows the number of exit packages according to their size across the public sector. The majority of exit payments are less than £50,000 and around 17% of payments were above £50,000. In the public sector as a whole in 2011-12, the average cost of exiting a member of staff was £25,000.

Across 5.4 million public sector workers4 and around 70,000 exits overall, 3,452 (or around 3%) payments were above £100,000. Payments at this level should generally only be made in exceptional circumstances or where an individual’s departure forms an important part of reforming or radically changing an organisation. Many individuals in receipt of payments at this level may not return to the public sector within a short period. However, for the small number of individuals that do return, the absence of recovery provisions represents a greater chance of unfair outcomes and poor value for money for the tax payer.

Cost of individual staff exits in 2012-13 by size of payment

Exit Costs Number of compulsory exits Other departures Total exit packages Total cost (£bn)
<£10,000 2,854 3,963 6,817 0.04
£10,000 - £50,000 13,862 39,373 53,235 1.0
£50,000 - £100,000 1,657 7,125 8,782 0.5
>£100,000 803 2,649 3,452 0.4
Total 19,176 53,110 72,286 2.0
Source: Whole of government Accounts (WGA) 2012-13

Question 3

Are you able to provide additional information in relation to instances of rehiring shortly after redundancy that would be relevant to this consultation?

Assessment

While provisions exist or are being negotiated in some workforces for recovering exit payments on rehiring, the government is concerned about the limited breadth over which such provisions apply. The evidence available on instances of rehiring suggests that this can lead to unfair outcomes and poor value for money for the tax payer.

From the perspective of the employee, exit payments and specifically redundancy pay provide compensation while they seek new employment and acts as a bridge between previous and subsequent positions. Where the individual returns after a short period the government believes this justification is weaker and if employers are not able to recover some or all of the payment, this represents poor value for money. For employers and the tax payer, exit payments play an important role in securing value for money reforms. However, where individuals are rehired after a short period by the same employer or another employer in the same sector, this reduces the overall value for money of such reforms. Overall the above suggests action is required to underpin employers’ policy on exit payments and provide additional assurance for the tax payer.

Question 4

What additional information or data is relevant to the government’s assessment of existing exit payment arrangements as set out above? Do you agree with this assessment?

4. Policy proposal

The government is proposing to take action to support fairness and value for money where exit payments are paid to employees or office holders who return to similar employment in the public sector within a year. It proposes to do this by establishing national requirements on the recovery of exit payments in the public sector and a framework for individual employers to take forward the changes needed to meet these requirements. These measures would underpin but not replace existing terms that go further to recover exit packages on reemployment.

The core elements of the government’s proposal are as follows:

  • to require high earning public sector employees or office holders to repay exit payments should they return to the public sector within 12 months on a pro rata basis; following similar principles to the Civil Service Compensation Scheme, individuals would be required to repay the full amount should they return before 28 days and a pro-rata amount should they return between 28 days and 12 months
  • to apply these measures to employees moving between the same part (or ‘sub sector’) of the public sector, with the definition of these subsectors to be determined as part of this consultation; the lead option is that they should be determined by workforce and/or according to government department reporting boundaries but that the detail of these subsectors should be established in legislation to allow for the inclusion of all local government bodies and public corporations
  • higher earners would be defined as any individual earning above £100,000; below this threshold a taper would apply – down to a second earnings threshold (proposed to be in the region of £80,000); for employees earning below this level recovery arrangements would be purely determined by the employer or through national contracts
  • these changes would represent a baseline legal requirement; they would be focussed on the highest earners in order to guard against the most unfair and poorest value for money outcomes; where employers’ existing or proposed policy go further these measures will support rather than replace them

The government’s aim is for this policy to apply across as much of the public sector as possible with only a small number of exceptions. The government’s starting point is the list of entities classified as central, local government and non-financial public corporation sectors as determined by the Office for National Statistics for National Accounts purposes; the most recently published version of this list, which covers a significant number of bodies, is available on the ONS website. Subject to the exceptions below and updates to reflect recent reforms or changes in the public sector, all bodies in this list would be included5. The government would also apply the measures to Ministers and their Special Advisers. For Members of Parliament, it will be for IPSA to decide whether equivalent arrangements should be implemented for MPs. The government’s preference is that equivalent arrangements should be put in place.

The government is considering excluding the Armed Forces, some public financial corporations and similar bodies – particularly Royal Bank of Scotland (RBS), Northern Rock Asset Management and Bradford & Bingley; and the National Museums. The reasons for these proposed exclusions are set out in the sections below.

The government will consider and invites views on the best way to define the sections of the public sector or “subsectors” across which redundancy payments would be recovered. The definition of subsectors indicated above would be along the lines of the groupings of bodies set out in the Government Resources and Accounts Act 2000 – subject to reconciling this list with the ONS definitions. This would mean employers would recover payment from for example, (i) senior hospital managers leaving one part of the NHS and rejoining another, (ii) a local government executive moving between authorities (iii) a head teacher moving schools and (iv) a Senior Civil Servant moving across Civil Service employers and (v) a higher paid employee of a non-Civil Service body included a Department’s reporting boundary (such as the Highways Agency) moving to a similar body (for example High Speed 2 limited) or to the parent Department, in this case Department for Transport (DfT).

In addition to the above (i) local authority maintained schools would be grouped with academies and other bodies captured under the Department for Education – rather than under Local government; and (ii) local authority companies would be included in the same group as local government, however the government will examine whether there is a case for certain types of company or individual cases to be included in alternative subsectors. And (iii) to preserve flexibility in the wider public sector labour market, the above definition intentionally excludes individuals moving from one public sector workforce to another (for example a civil servant who takes up employment as a classroom teacher) or otherwise across the boundaries defined above (for example an individual made redundant from a non-Civil Service arms length body of DfT moving to a similar organisation reporting to another government department).

The government is proposing to apply recovery provisions to both lump sum payments and any benefits to employees who are offered early access to pension. However, this would exclude those public service pension schemes where there is an established unqualified right to a full, employer-funded, unreduced pension in the case of redundancy set out in scheme regulations or rules. This reflects the government’s belief that recent reforms to public service pensions represent a settlement which should last for at least 25 years, if not longer.

Finally, the government proposes that in exceptional circumstances the recovery provisions may be waived with approval from the relevant secretary of state. Such approvals would be granted in an open and transparent way and only where it offered value for money for the tax payer.

To provide confidence that these measures will be adhered to and to ensure public sector employers have the necessary powers to introduce them, the government proposes to bring these limits forward in a framework bill in the fourth session of this parliament. It will be the responsibility of individual employers and government departments to implement the changes necessary to adhere to the nationally decided limits. The government would expect reforms by individual employers to be completed by no later April 2016, with the final deadline to be decided following consultation.

Question 5

Do you agree that the government should introduce nationally determined rules on the recovery of exit payments where higher earning employees re-enter the public sector?

Question 6

What alternative proposals would better achieve the government’s aims? Please provide evidence, examples and/or data to support your response.

Question 7

Under the government’s proposals, do you agree with the proposed approach to defining the subsectors across which exit payments would be recoverable? If not what alternatives would you suggest and why?

Question 8

Do you agree that similar limits should apply to employee benefits from early retirement on unreduced pension (where this option is available) on the basis outlined above?

4.1 Payments and individuals in scope

Recovery provisions would apply to all existing and future employees of the organisations covered by the policy. Some existing high paid employees may have a contractual right to compensation. The government believes these proposals, focussed on improving value for money, should also apply to these individuals. It therefore intends to take a power to enable the variation of existing contractual terms where they contradict with the policy proposed in this consultation. The government is carefully considering where it would be appropriate to do this and it would like respondents’ views on where this might be appropriate. The government does not anticipate that future contracts would contain contradictory terms but will monitor this closely.

The provisions would cover a wide range of possible payments to employees in order to ensure it is effective. The government considers the following payments as relevant in this context:

  • redundancy payments – these will include both voluntary and compulsory redundancies, whether offered on an individual basis or as part of a workforce-wide scheme
  • voluntary exit payments
  • discretionary payments made to buy out actuarial reductions in pensions to allow for early retirement (subject to the condition outlined above)
  • ex gratia payments and special severance payments
  • compensation payments due as a matter of contractual entitlement
  • payments representing the value of fixed term contracts
  • payments made to facilitate a dismissal on the grounds of efficiency
  • payments in lieu of notice
  • payments that have a potential if not actual monetary value, including share options or benefits in kind

The government is also considering additional rules in relation to the cashing up outstanding entitlements (such as outstanding leave or allowances that are cashed up and added to the value of the sum) – to ensure such payments cannot be used to circumvent the proposed restrictions.

Payments would be in scope whether the exit payment is paid as part of a standing compensation scheme, a one-off arrangements or under the terms of an individual contract of employment, whether open-ended or fixed-term. Exit payments in respect of injury attributable to the employment, serious ill health and ill health retirement would be excluded.

Question 9

Do you agree that the payments listed above should be in scope for the purposes of recovery on reemployment within the public sector under the terms set out in this consultation? Are there further payments that the government should include? Do you believe certain payment types should be excluded? Please provide a rationale and examples.

4.2 Detailed terms of recovery

The terms of recovery would broadly follow arrangements currently operating within the Civil Service with the period for recovery extended to 12 months, they would be as follows:

  1. If the person is re-employed within 28 days the full amount of the exit payment should be repaid
  2. If the person is re-employed outside the 28 day period but within the lesser of:
    • 12 months
    • the notional period of the exit payment in terms of months or weeks of final pensionable earnings represented by the lump sum exit payment received (then the person will be required to repay the full exit payment reduced by a pro-rated amount which accounts for the difference between the date of leaving and date of re-employment. The box below provides an example.)
  3. There will be no requirement to repay an exit payment if the person is re-employed after 12 months.
  4. No recovery will be sought for appointments made on a casual basis for less than 15 days in any period of 91 consecutive days.
  5. The government would seek to ensure that it would not be possible to avoid the provision through re-engagement as a contractor or consultant, and it would seek to do this in a way that does not prejudice fair competition between suppliers of services to government.
  6. to allow for tax and National Insurance Contributions (NICs) paid on income recovered the recovery amount would be reduced to take account of the tax and NICs paid on exit payments made, and further reduced if the person is re-employed on a lower salary (by the proportionate difference in pensionable pay).

The government proposes to limit the maximum amount recovered outside of the 28 day period so as not to recover beyond the statutory minimum under the Employment Rights Act 1996 (ERA 96) or, where the statutory minimum is not legally required, so as not to recover beyond an amount equivalent to the statutory minimum. Provisions for statutory minimum redundancy pay under the ERA 96 restrict the amount of an exit payment which can be recovered. ERA 96 only applies to some public sector employers, such as local government but not for example the Civil Service.

Recovery of benefits to employees who are offered early access to pension in place of a lump sum exit payment would operate as follows:

  • employees would be required to make a payment to the previous employer equivalent to the cost to the employer of topping up the individual’s pension
  • reflecting the fact that the payment will have been put into pension and the funds may not be immediately available to the individual, the government would include provisions which allow employers to offer employees the ability to spread their repayment over time
  • as detailed above and reflecting the government’s 25 year commitment following the pensions reform, recovery would not apply for those public service pension schemes where there is an established unqualified right to a full, employer-funded, unreduced pension in the case of redundancy set out in scheme regulations or rules

The government has also considered recovering payments through abatement provisions. This would see the employees’ pension reduced on re-employment with compensation recovered to the full extent of employers’ contribution toward pensions. This is not the government’s preferred option, in particular where abatement is not already provided for in scheme rules, because it would necessitate changes to scheme designs which have been negotiated as part of the ongoing programme of reform to public service pensions, thus contravening the government’s commitment that these schemes should be sustainable for 25 years, if not longer.

As with the recovery of a lump sum, any recovery of the pensions top ups will be reduced to reflect the period until re-employment, any difference in salary, any tax liability that the employee might, exceptionally, have been liable to pay, and the statutory minimum redundancy pay.

Overall the government believes these proposals would represent a fair balance between value for money for the tax payer, fairness for public sector employees and flexibility regarding re-employment which avoids an unnecessary discouragement to return to work. Employees would retain compensation for the period during which they have been unemployed or in alternative work based on their salary on departure, irrespective of whether or not they return on a lower salary.

Question 10

Do you agree with the proposed terms for the recovery of exit payments on reemployment? What alternative approaches would you suggest and why?

Illustrative example of recovery calculation

A public servant with 14 years’ service earning a salary of £100,000 receives a redundancy payment of £116,700 (before tax) for 14 months pensionable pay.

They then take up a position in the same public-subsector after two months from exit and on a lower salary of £90,000.

Details of calculation

Step 1 – base amount to be recovered:

£116,700 (original payment) - £16,700 (two months pay to be retained) = £100,000

Step 2 – adjustment of base amount to account for lower salary in new role:

£100,000 (base amount) x £90,000 / £100,000 (adjustment factor) = £90,000

Step 3 – a further reduction would be applied to take account of tax paid at the time of exit.

Total to be recovered (excluding tax adjustment) = £90,000

4.3 Compliance and enforcement

An obligation to repay exit payments would be set out in legislation. It would form part of the contractual terms of an individual’s departure. All employers would be required to include in employment contracts a right to dismiss employees who are found to have breached the rules on repayment set out above. In addition to this, previous employers will have recourse to the courts to enforce the recovery of the exit payment.

The onus would then be placed on the individual to notify their new and previous employer that compensation will need to be repaid should they be re-employed by another public sector employer.

Employers would be required to request the individual to inform them whether they have received an exit payment in scope of the policy in the last 12 months as part of the normal pre-employment checks. The government will also consider whether additional requirements around the reporting of recovered payments are necessary to further support compliance.

Question 11

Do you agree with the proposed measures for compliance and enforcement of recovery of exit payments?

4.4 Earnings exemption and taper

The government’s primary motivation for introducing these measures is to provide additional assurance against unfair outcomes. Reflecting this, it is particularly keen to ensure that lower earning, longer serving employees are not affected by the policy. The government believes the best way to achieve these aims is to set an earnings threshold above which the policy would apply. Recovery of payments for employees earning below this threshold would remain a matter for individual employers.

Reflecting the above, the government proposes to recover payments from all employees earning above £100,000 per annum in the position from which they departed. To avoid introducing a sharp difference in the rules at this earnings level, a taper would apply below this level. Individuals earning up to a second (lower) earnings threshold would have payments recovered on a reduced basis. The government’s lead option for achieving this is set out in the table below – with the proposed lower earnings threshold to be finally decided upon following this consultation. As indicated above, these measures represent a baseline legal requirement. Where employers’ existing or proposed policy go further they will underpin rather than replace them.

  Earnings % of payment to be recovered
Primary threshold £100k + 100%
  £95-99.9k 80%
  £90-94.9k 60%
  £85-89.9k 40%
Lower earnings threshold £80-84.9k 20%
Excluded from policy £0-79.9k Entirely determined by employer

Question 12

Do you agree with the proposed mechanism for targeting the recovery provisions? If you disagree, what alternatives would better achieve the government’s aims as set out in this document?

4.5 Scope of bodies affected

The government believes tax payers should be reassured that recovery arrangements are also applied in those parts of the public sector where central government exerts the least control. As such, restricting this policy to a narrower definition of the public sector, such as that employed in the government’s recent reform of public service pensions, would not achieve the aims of ensuring fairness and value for money.

The government is considering applying these measures to entities classified within the central and local government and non financial public corporation sectors as determined by the Office for National Statistics for National Account purposes. A list of bodies that have been classified by the ONS under this definition is available on the ONS website6. The government would also apply the measures to Ministers and their Special Advisers.

Future additions to, and removals from, this list would be considered on a case by case basis. The government’s intention is to seek powers to add and remove bodies from any legislation needed to implement this policy, in order to allow flexibility to respond to future changes in the scope of the public sector.

The government is considering a small number of exceptions to these measures. The first of which would be the Armed Forces. An Armed Forces career has unique features and the special requirements made of individuals, including the transition from military to civilian life, are reflected in the range and level of compensation payments for this workforce. Compensation and resettlement payments make up a core part of the overall remuneration and reward package for those working in the Armed Forces and payments are sometimes required in order to ensure that individuals are properly compensated for what can sometimes be lifelong impacts felt at relatively early ages. The government believes it is right that the Armed Forces have a flexible and responsive set of remuneration practices which fall outside of the regime being established by this policy.

The government also proposes to exclude the National Museums. In 2013 these organisations were granted a number of freedoms to enable them to operate on a more commercial basis. As part of the four year trial of these freedoms the government would not impose additional restrictions on exit payments proposed for the rest of the public sector.

Finally the government proposes to exclude some public financial corporations and similar bodies – particularly Royal Bank of Scotland (RBS), Northern Rock Asset Management and Bradford & Bingley and any associated subsidiaries of these organisations. These are commercial financial organisations whose assets the government intend to return to the private sector in a way that ensures taxpayer value for money. Requiring compliance with the payment recovery arrangements would likely be detrimental to the government’s efforts in doing this, both directly as it will reduce their ability to function on purely commercial lines, and indirectly through the perception of the government taking direct involvement in the day-to-day management of these organisations.

The government will carry out a new burdens assessment to compare the additional costs to local government of operating these proposals. This will also take into consideration the financial benefit of the policy to local authorities from recovery of payments.

Question 13

Do you agree that the government has established the correct scope of bodies for the implementation of this policy?

Question 14

Do you believe that there is a more appropriate way of delivering the government’s stated aims, either through use of a different definition or a different approach to setting the scope of the policy?

4.6 Devolved administrations

This policy will extend to all of those bodies where employment and remuneration practices are the responsibility of the UK government. It will be for the Scottish government, Welsh government and Northern Ireland Executive to determine if and how they want to take forward similar arrangements in relation to devolved bodies and workforces. The government will request Legislative Consent Motions from the Devolved Administrations where appropriate, which will give the relevant Administration the option of including devolved workforces under the legislation which the government will be bringing forward. However, if and when a Legislative Consent Motion is required, it will be for the DA themselves to decide whether this is desirable approach. The government believes that a single, UK-wide approach to these payments would be preferable.

Should the provisions be within devolved competence, but the relevant devolved administration does not wish to be part of the government’s arrangements, the government proposes the approach set out below:

  • for individuals who receive an exit payment in a non-devolved public sector role and then move to a position in an equivalent part of the public sector in a devolved administration, the government will seek to recover the payment according to the terms above
  • however, it will be for the devolved administrations to decide whether to recover payments from individuals who move in the opposite direction – i.e. after receiving an exit payment from a devolved public sector employer and then subsequently coming to work in a role in an equivalent part of the UK public sector where pay and terms and conditions are not devolved

4.7 Exceptions process

The government recognises that under exceptional circumstances it may be desirable to exempt individuals from repayment on reemployment shortly after departure. For example, it may be necessary to exempt from recovery the elements of particular exit payments used either to settle statutory disputes or claims, or disputes or claims under an individual employment contract.

An exemption from repayment on re-employment would represent a financial loss to the previous employer from not recovering the compensation payment made to the employee under the terms set out in legislation.

Bodies covered by Managing Public Money

For bodies covered by the Managing Public Money (MPM) Guidance an existing process exists for decision over such losses. Irrespective of the amount of money concerned the guidance requires decisions over losses which involve questions of principle, are novel and contentious, or meet a number of related criteria to be consulted on with the Treasury (unless specific delegations have been provided to individual departments or organisations). Managing public money covers a significant part of the public sector including the Civil Service and NHS.

The government proposes to use a similar mechanism for handling exceptions to the recovery provisions set out above. This would involve the following:

  • the default position would be that any waiver would require Secretary of State consent, subject to Treasury controls and delegations to departments
  • all such exceptions would be required to be disclosed in departmental accounts in a way that is consistent with rules on data protection
  • as with the definition of subsectors, the government’s starting point is that the relevant Secretary of State would be determined by which department the body reports to for accounting purposes, case by case adjustments to this may then be made depending on the final decision over the definition of subsectors

Public Corporations and Local government

For public corporations the government proposes that Treasury approval should be sought in the same way as bodies covered by MPM. The government will establish the most appropriate vehicle for setting these requirements out. As with individual departments, the Treasury may delegate decisions on exceptions to the Shareholder Executive, with the default arrangement being that any exceptions must be approved the Secretary of State for Business.

4.1 For local authorities, the government proposes that all exceptions must require the approval of Full Council, or a meeting of members in the case of fire and rescue authorities. Authorities would be required to publish a policy on the limited circumstances in which they would consider the granting of an exception. In line with bodies covered by Managing Public Money, authorities would be required to disclose all such exceptions in their annual Statement of Accounts, in a way that is consistent with Data Protection rules.

Question 15

Do you agree with the proposed terms for the exemption of the recovery of exit payments on reemployment?

5. Impact analysis

Economic and fiscal impacts

It is expected that the fiscal impacts of this policy will be small but positive. By ensuring the recovery of at least part of high-paid individuals’ exit payments when they return to the same part of the public sector within 12 months, the policy will protect the tax payer and ensure value for money.

It is for departments and other individual employers to make decisions on individual staff exits. The number of exits, individual’s characteristics and whether they will be in scope of the policy will depend on employer decisions, developments in government policy, the wider economy, society and administrative systems that cannot be anticipated at present. This presents a challenge around estimating potential future redundancies that might fall in the scope of this policy and the precise fiscal impacts of the policy.

Social impacts – including distributional and equalities

This policy will result in some individuals having to return exit payments on reemployment. However, the resulting effects on the numbers who volunteer, or who are otherwise selected, for exit and or rehiring will depend on individual employer and employee decisions, both under the policy and the counterfactual scenario where this policy was not put in place.

In terms of impacts on groups protected under equalities legislation, using data from the Labour Force Survey (LFS)7, it is possible to break down the working age population by whether they work in the private or public sector – and by age, gender, ethnicity, religion, disability and marital status. To assess the potential impact of this policy, statistics for the total population and the total UK workforce are compared to the statistics for public sector workers.

The LFS, however, cannot be used to estimate the proportion of the public sector workforce according to sexual orientation, gender reassignment status, pregnancy or maternity status – and therefore cannot estimate the impact of this policy on these groups.

LFS analysis shows that, compared to the wider working population, the public sector workforce has a greater proportion of: females; people aged between 40-59; people who declare themselves to be Christian; people who declare they are White or Black/African/Caribbean/Black British; people who declare they are married, cohabiting or in a civil partnership; and people who declare they have some form of disability. Therefore, as a consequence of the public sector composition, individuals with some of the above characteristics may be more likely to be affected by this policy.

Further analysis will be completed of this policy as further information becomes available. Following the policy’s introduction an assessment into equality impacts, directly or indirectly, will also be completed to make sure if there are any that these are objectively justified.

Environmental

This policy is estimated to have no environmental impacts.

Costs and benefits – direct and indirect

The policy will produce a benefit to employers by allowing them to recover at least part of the exit payment when an individual returns to work within the same part of the public sector within a year. This will contribute more widely to the public finances as outlined above.

The potential costs of the policy include: familiarisation costs and other associated one-off costs, as well as ongoing HR costs, of implementing and ensuring compliance with the policy, marginal potential impacts on the uptake of voluntary redundancy schemes, and (for the employee) the reduction in compensation an ex-employee is allowed to retain when they are reemployed (which the government believes is justified on grounds of fairness and value for money).

Additional impacts include those relating to possible behavioural effects on employees’ decisions about whether and when to seek further employment elsewhere in the public sector when they have been made redundant. However it is not possible to reliably estimate this with the data available at this time.

Regulatory impact

This policy primarily affects the public sector and so is not expected to increase regulation on private business in the wider economy.

The policy will impose a small transitional cost and place restrictions on compensation arrangements for some Limited Companies that are classified as public sector organisations. Such organisations are small in number compared to the wider business population.

Depending on final decisions, the policy may also impact on private sector bodies employing staff previously from the public sector that are subject to Transfer of Undertakings (Protection of Employment) (TUPE) rules or those who return as private sector contractors. These impacts cannot be quantified at this stage.

Enforcement and implementation

The policy will be provided for in primary legislation in Parliament, although many of the details may be set out in secondary legislation or directions made under that primary and secondary legislation. It will therefore be a legal requirement that public sector organisations recover at least part of the exit payments made to a high-paid individual when they return to the same part of the public sector after a short period of time.

The recovery of compensation payments will be enforced by allowing previous employers to use the courts to recover payments.

Question 16

Are there other impacts not covered above which you would highlight in relation to the proposals in this consultation document?

Question 17

Are you able to provide information and data in relation to the impacts set out above?

  1. Managing early departures in central government, National Audit Office, March 2012

  2. Health Select Committee evidence for inquiry into: Public expenditure on health and social care Seventh Report of Session 2013–14 2

  3. This list does reflect all reforms or changes that have take place in this parliament.

  4. ONS Public Sector Employment Q1 2014 headcount

  5. The ONS list includes some financial funds which do not employ any staff and bodies where no exit procedures or payment arrangements exist. These may be included by default, though the proposals would have no impact on the bodies concerned.

  6. This list is maintained by the ONS.

  7. The LFS does not cover the Armed Forces. Average quarterly data is used covering the period Q1 2013 and Q4 2013 instead of the latest quarterly data as quarterly data is not seasonal adjusted, therefore may result in bias. All data covers the UK, except for the religion data which is GB level.