Public sector retirees face higher exit payment scrutiny

Strain costs are incurred when members are allowed to retire early on grounds of efficiency, redundancy or otherwise with the consent of the employer. 

In July 2020, the Treasury attempted to place a cap of £95,000 on exit payments, following through on a consultation launched in 2015. Strain costs were to be included in that cap. 

But the plans met with significant criticism, including appeals to the High Court, compounded by the revelation that the then-new Treasury rules contradicted Local Government Pension Scheme regulations from the Ministry for Housing, Communities and Local Government, since rebranded as the Department for Levelling Up, Housing and Communities. 

Rather than apply an absolute cap to exit payments, the proposal seeks to beef up the approval process

Ian Colvin, Hymans Robertson

Consequently, the government disapplied the cap in February 2021, while stressing that it remained “vital that exit payments deliver value for the taxpayer, and employers should always consider whether exit payments are fair and proportionate”.

It promised to bring forth new proposals to tackle “unjustified” exit payments, and on August 8 the Treasury unveiled a new consultation on measures to control them.

Control and approval of exit payments

The government remains “concerned” about the number of large exit payments, which in some cases are worth several times more than the average annual earnings in the public sector.

The new proposals do not amount to a reimposition of the exit payment cap discarded in February 2021, but rather replace the cap with a system under which large payments must be scrutinised. Payments exceeding £95,000 are likely to be those subject to closer scrutiny.

“It is appropriate that more costly decisions receive additional scrutiny, and setting the threshold at this level will achieve this, while ensuring that the additional administrative burdens of the process will only apply to a relatively small number of cases each year,” the consultation explained.

In addition, cases where total payments (as opposed to strictly exit payments) exceed £95,000 will require additional reporting to the Treasury, and approval from a secretary of state, in order that the government develop “a clear understanding of where larger exit payments are being made and can consider further action”.

The policy intent is that the new regime should provide greater confidence that agreements over staff exits will benefit the taxpayer, by ensuring that all potential alternatives have been “robustly considered” and that discretionary payments are “appropriate and proportionate”.

“The processes will also ensure a better understanding in HM Treasury of the circumstances under which large exit payments are being made. This will support the government’s wider aim of ensuring that there is public confidence in the way exit payments are used in the public sector,” the consultation continued.

The Treasury stressed that the new regime will not deprive public sector staff of benefits to which they are entitled, whether by contract or statute. Rather, the approvals process will cover employers’ decisions to offer or mandate an exit, and the discretionary amounts paid out.

The consultation also proposes a measure that would see exit payments recovered where individuals are quickly reemployed in the public sector, as these cases “may suggest that a solution other than a paid exit would have been appropriate”. This would see clauses attached to exit payments that stipulate the conditions under which they may have to be repaid.

Pensions most affected

The consultation outlines the disparate impacts the new regime is likely to have on different parts of the public sector. For example, overrepresentation of women in the civil service, the NHS and in teaching professions will likely see more instances of exit payments sent to the Treasury for review. 

As exit payments are often tied to salary level and length of service, the fact that men are “slightly overrepresented” in senior positions in the civil service “and some other relevant workforces” will lead to a higher proportion of men having their exit payments reviewed.

Pension strain payments are likely to be a key factor in determining which cases are subject to review and approval, however. These arise when an LGPS pension is paid unreduced before a member’s normal retirement age, in the event they are allowed or encouraged to retire early.

Because of the potentially significant sums involved, the consultation explained that those nearest retirement will likely accrue larger exit payments, which “therefore [makes] their cases more likely to be assessed”.

“While individuals in these groups may be more likely to have cases which are reviewed under the proposed processes, we think it is unlikely that there will be undue negative consequences,” the consultation said. 

“All cases will be rigorously assessed against the stated criteria, and there will be no pre-judgement of the outcome in any individual cases.”

Ian Colvin, Hymans Robertson's head of LGPS benefit consulting, noted that the new consultation "takes a slightly different approach from previous government intentions to cap exit payment at £95,000".

"Rather than apply an absolute cap to exit payments, the proposal seeks to beef up the approval process and to give the relevant department secretary of state the final say on whether a £95,000 plus payment can be made. The expectation is that approval will only be granted in exceptional circumstances.

“The consultation also takes the opportunity to strengthen the approval process for special severance payments i.e. payments to public sector workers on leaving, over and above their statutory or contractual entitlements. Approval, however, will only be forthcoming where very stringent criteria are met.

“The consultation outlined today will only apply to central government bodies, so local authorities will be keen to see what DLUHC intend to do in this space and any implications this may have for the LGPS.”

The consultation closes on October 17.