Friday, August 07, 2015

How the exit payment cap will hit career public servants a long way from senior management...

Yesterday, I congratulated a colleague for highlighting the Government’s consultation on the “exit payment cap”. This has been presented as being about limiting excessive severance payments to public sector “fat cats” – with a ceiling on payments of £95,000.

However, because the “cap” will include the “capital cost” of allowing unreduced pensions to workers made redundant above the age of 55 (which is a statutory right for those of us in the Local Government Pension Scheme(LGPS)) it will be forced upon many more workers than just the most senior managers.

The last Government promised that the 2011 settlement would last for 25 years, but now, four years later they propose to force through a significant change in the LGPS – which will hit people who are not receiving excessive payments when forced into redundancy.

To give a rough idea of how this “cap” can hit people on middle incomes if they have long service it is possible to calculate early retirement costs using a document from the Warwickshire Pension Fund available online. This includes a ready reckoner which is only intended to be used for the employers in that fund, but it serves to illustrate the point that this “cap” fits people we wouldn’t normally think of as fat cats.

Example One
Someone made redundant at 55 on 1 April 2016 with thirty years service, earning £40,000 and receiving a redundancy payment based upon the statutory calculation (but at the rate of an actual week’s pay) as well as pay in lieu of notice would cost the employer the following;
Early retirement cost = £78,800
Redundancy = £20,700
Pay in lieu = £9,200
Total cost = £108,700 exceeding the cap by £13,700
A 55 year old with thirty years service would need to be earning less than £35,000 before they escaped from the cap on this basis. Those local authorities paying more generous redundancy packages would find the cap fitting at a far lower salary.

Example Two
Someone made redundant at 56 on 1 April 2016 with forty years service, earning £35,000 and receiving a redundancy payment based upon the statutory calculation (but at the rate of an actual week’s pay) as well as pay in lieu of notice would cost the employer the following;
Early retirement cost = £74,200
Redundancy = £18,400
Pay in lieu = £8,050
Total cost = £100,650 exceeding the cap by £5,650

These examples are both relatively well paid workers compared to the national average, but they are hardly wealthy. The first example corresponds to someone who has spent a career in local government since leaving college and has worked their way up to a senior professional or middle management role. The second example corresponds to someone who has spent a career in local government since leaving school and has worked their way to a professional role.

These are the career public servants who have worked for decades knowing that they would at least get an unreduced pension if made redundant at the appropriate age.

They have seen this age go up from 50 to 55. They have seen the disappearance of the “added years" previously given to workers receiving their pension on redundancy.

Now they face the Government imposing a “cap” which – if it comes in as planned – will mean that they will not be entitled, if made redundant, to payments which are, at present, their statutory or contractual entitlements.

A further consideration is that, within the LGPS, because different employers are paying different contribution rates, the "early retirement cost" of "pension strain" for employees with the same salary, age and service will differ from one Council to another (which will mean that the "cap" will apply differently in different areas in what some local government officers are already describing as a "postcode lottery").

UNISON must alert the many members who will be threatened by this change so that they can respond to the consultation and lobby Members of Parliament. We also need to ensure that employers understand how this “cap” will impact upon them – many workers who might accept redundancy with an unreduced pension will resist redundancy when the cap is imposed.

Whilst your humble blogger should declare an interest (in the sense that I am a career public servant in my fifties) I can reassure regular readers of this blog at the UNISON Centre (Sid and Doris Euston-Towers) that I don't intend to retire any time soon...


2 comments:

derek said...

Hi Jon
Interesting article. as a fellow 50+ Unison member there is another financial penalty awaiting public sector workers. The Govt promised a flat rate pension of £7500 for all state pensioners. However there is a clause in the bill which states
that if you are part of a final salary scheme your employer will have automatically opted you out of part of your state pension contribution and the new pension will penalise you for this reducing your state pension significantly. Tens of thousands of Unison members will be affected by this.Havent seen any publicity or campaign from unison as yet on this but strangely enough both the Mail and Telegraph(Not normally friends of the public sector) have highlighted this.
Keep up the good work.
Cheers
Derek

Anonymous said...

Another crippling aspect that many gave not realised which is a game changer, is that if you are made redundant/retire at 55 you are in fact taking early retirement. Your pensionable age is 60/63 so the 5/8 years that you have retired early have to be made up even on a reduced pension. eg. reduced pension accrued at age 55 is £20k employer has to pay 5/8 years x £20k to allow you to take your reduced pension before retirement age. So the 'pension strain' also gets add into the redundancy payment, pay in lieu mix vastly increasing it by an extra £100-160k making your total payout £200 - 260k way over the £95k cap. This is a hidden factor that will crucify many hard working, long service civil servants for doing the right thing and investing in their pensions.