Restricting exit payments in the public sector

The government is consulting on its much-delayed plans to cap exit payments in the public sector at £95,000.

In 2015 the government passed legislation enabling it to make regulations to impose such a cap but progress on it was delayed. Payments in excess of £100,000 are, according to government figures, estimated to have cost the taxpayer £198m in 2017-17.

The current consultation sets out how the cap will be implemented and those bodies which will be covered. The details are contained in the draft Restriction on Public Sector Exit Payments Regulations 2019 and associated annexes. There is no date for implementation, although the government says the reforms will be introduced 'without further delay' possibly indicating implementation later in 2019.

Implementation will be in two stages: the first stage will capture most public sector employees (including the civil service, local authorities and schools), before extending the cap to the rest of the public sector in the second stage.

An ‘exit payment’ is defined in the draft regulations as a payment of a prescribed description which includes any payment:

  • on account of dismissal by reason of redundancy
  • made pursuant to an award of compensation under the ACAS arbitration scheme or a settlement or conciliation agreement
  • made on voluntary exit
  • made 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
  • ex gratia or severance payment
  • to extinguish any liability to pay money under a fixed term contract
  • under a contract of employment or otherwise, in consequence of termination of employment or loss of office
  • in lieu of notice due under a contract of employment (although those which amount to less than a quarter of an individual’s contractual entitlement will not be included in the sums subjected to the cap)
  • in the form of shares or share options

Payments which are not 'exit payments', such as death in service, injury compensation and pay in lieu of untaken holiday, are expressly exempted from the cap.

The exit cap proposals should not be confused with the power to recover public sector exit payments if the person to whom the payments has been made (and whose earnings are at least £80,000) returns to the public sector within 12 months. These individuals will be required to pay back some or all of the exit payment associated with their former public sector employment. The regulations will only apply to those who’ve both left and become re-employed in relevant public sector employments, on or after the effective date that the regulations come into force.