Public Sector Exit Payments Reform

This article is now out of date following recent news – please see Revocation of the Public Sector Exit Payment Cap.

On the 1st February 2017, section 41 of the Enterprise Act 2016 came into force capping public sector exit payments at a maximum of £95,000.

Public Sector Exit Payment Regulations have been drafted setting out the details of the proposed cap - but the Regulations have not yet been brought into force.

The draft Regulations state that the £95,000 cap will apply before tax, and will cover the total aggregate value of the following payments:

  • Any payment on account of dismissal by reason of redundancy.
  • Any payment on voluntary exit.
  • Any payment to reduce or eliminate an actuarial reduction to a pension on early retirement or in respect of the cost to a pension scheme of such a reduction not being made.
  • Any severance payment or other ex gratia payment.
  • Any payment in respect of an outstanding entitlement.
  • Any payment of compensation under the terms of a contract.
  • Any payment in lieu of notice.
  • Any payment in the form of shares or share options.

The government has also said that it is in the process of implementing a new framework which all public sector employers will need to adhere to.

The framework includes:

  • A maximum tariff for calculating exit payments at three weeks' pay per year of service.
  • A cap of up to 15 months' salary on all redundancy payments.
  • A cap of £80,000 on the salary to be taken into account for the calculation of exit payments.
  • A taper on the lump sum compensation an employee is entitled to receive, the closer they get to normal pension age or target retirement age of the pension scheme.
  • Reducing the cost of employer-funded pension top up payments, such as limiting the amount of employer funded top ups for early retirement, or removing access to them.

The government expects Departments to produce proposals to implement the framework and to have made the necessary changes by the end of June 2017.

Impact on Public Sector employees: NHS example

Agenda for Change NHS employees are currently entitled to one month’s pay per year of service (up to 24 years) as part of their redundancy terms. Under the government proposal, that will be slashed to three weeks’ pay, and the final figure will be limited to 15 months’ salary. This would mean for example, that someone on Agenda for Change pay point 21 (Band 5 or 6) with more than 24 years’ service could lose around 45% of their redundancy payment entitlement. 

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