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Barnett Waddingham
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Exit Payment Cap - your questions answered

Published by Graeme Muir on

On 23 May 2015 the Government announced its intention to end six figure exit payments for public sector workers, believing that these payments are not fair an neither do they 'offer value for money to the taxpayer who funds them'.

As well as the proposal to put a cap on the highest exit payments, the government stated their intention to consider further reforms including employer-funded early retirement in redundancy. Our response submitted on 26 August 2015, is primarily on the proposal to include early retirement pension costs into the cap.

We trust these comments are helpful.

Q1: What other forms of exit costs do you think are relevant in this context?

A: We are not aware of any others.

Q2: Do you agree that the government should introduce a cap on the value of public sector exit payments on the basis set out above?

Q3: 
Do you agree that the payments listed above should be subject to a cap on exit payments under the terms set out above? If you believe certain payment types should be excluded please provide a rationale and examples.

A: 
We shall answer Q2 and Q3 as one.

We know the Government is looking to reduce costs further across the public sector which will inevitably mean a further reduction in headcount.   The imposition of a cap including early retirement pension costs will make this more difficult to achieve for public sector employers as the useful early retirement tool for over 55s may no longer be available in all cases, particularly for the higher paid who will help make the biggest savings.  This could lead to a change in the workforce profile with a much larger proportion of older expensive staff who make not always be the best “value for money”. 

The legislation governing many public sector funds would need to be amended as at the moment those being made redundant or retired on efficiency grounds, usually over the age of 55, may be entitled to these unreduced early retirement benefits.  Alternatively the rules could be changed so that if these employees on exit did exceed the cap then their benefits could be reduced (but perhaps not a full reduction) so employers could still manage down the workforce as part of the required cost reduction.

Alternatively we would perhaps suggest a modified approach which had maybe a “cash cap” and a “pensions cap” where in aggregate this may be more than £95k but had a lower cash element – say £50k.  The rationale for this is that the early retirement pension costs are only the present day value of the costs that would arise if the employee concerned lives to their assumed life expectancy as well as some other assumptions being borne out in practice.  If they die before then (50% chance assuming the life expectancy assumptions prove to be correct) they will not have cost as much as the cost calculation.  Equally of course they may live beyond their life expectancy (another 50% chance). Given the uncertainty as to whether the strain costs will in fact be the actual costs it may be more acceptable to only include a proportion of the calculated strain costs or have a higher pensions cap.  This would still of course require changes to the legislation governing pubic service pension schemes.

Alternatively exclude early retirement pension costs from the cap altogether and have a lower cash only cap.

Q4: Are there further payments that the government should include?

A:
None that we are aware of.

Q5: Do you agree that a cap on exit payments should be set at £95,000? If you think an alternative level would be more appropriate, please provide evidence and analysis to support your proposal.

A: As already indicated this could have unintended consequences if early retirement pension costs are included. Please see the table for an example of the sorts of costs or numbers that would be included in the cap, that would arise in the Local Government Pension Scheme for a 55 year old receiving unreduced benefits.

As they will also be entitled to cash redundancy payments then there will of course be less than £95k left to absorb any early retirement pension costs.  So in practice there could be the potential for a basic rate tax payer (albeit at the top end) with a long career in public service to have a cash cost and pension cost in aggregate in excess of the £95k cap – is this the intention?

Q6: Are there other ways to ensure such arrangements are consistent with the cap on lump sum payments?

A:
 See response to Q2/3.

Q7: Do you agree with the proposed approach of limiting early retirement benefits with reference to the cost for the employer? What alternative approaches would you suggest and why?

A:
 Our response to Q3 also refers.  In addition, the calculation of the early retirement pension cost is an issue that would need to be resolved as there are different ways of calculating this for different purposes – in the LGPS, Funds already recognise these costs but on bases consistent with assumptions underlying the calculation of employer contribution rates and so will reflect different investment and funding strategies, longevity etc.  So it will vary amongst Funds.  As far as we are aware no such calculations are completed in the unfunded schemes so a question would be should the calculation basis reflect “local“ issues or should it be the same basis for all public service schemes?

Q8: Do you agree that the government has established the correct scope for the implementation of this policy?


A: Excluding quasi-public sector employers who may still ultimately be funded in the main by tax payers is likely to provoke some accusations of whether the policy is “fair”.

Q9: How do you think the government should approach the question of employees who are subject to different capping and recovery provisions under TUPE rules following a transfer to (or from) the private sector and whether there should be consistency with public sector employees in general?


A: Again the lack of a level playing field is likely to question the fairness of what is being proposed.  Those private sector employers who have inherited these potential liabilities however may welcome such a level playing field.

Q10: Do you agree with the proposed approach for waivers to the cap on exit payments?

 

A: Our response to Q2/3 refers – this proposal does seem to be at odds with the expectation that public sector employers will have to re-organise to meet cost reduction targets and so some form of waiver in these circumstances does seem appropriate.

Q11: Are there other impacts not covered above which you would highlight in relation to the proposals in this consultation document?

 

A: None that we can think of.

Q12: Are you able to provide information and data in relation to the impacts set out above?

 

A: No but see the table included in our response to Q5.

About the author

  • Graeme Muir

    Graeme is Fund Actuary to a number of Local Authority Pension Funds and also advises a large funeral trust. Graeme also provides strategic investment advice to a number of clients.

    View Biography

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