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We previously reported on the government's proposals to introduce a £95,000 cap on public sector exit payments. The government has now given the go ahead to this wide-ranging cap, which is likely to include teachers, council workers and the police.
It has now been confirmed that public sector exit payments must not exceed £95,000 in any period of 28 consecutive days.
The cap will apply to 'all entities within central and local government and non-financial public corporations sectors as classified by the Office for National Statistics for National Accounts purposes'. This includes most statute schools, County Councils and District Councils.
There are a list of exemptions to this cap including the Royal Bank of Scotland, Financial Conduct Authority and Armed Forces. The government expects these bodies to implement their own commensurate cap on exit payments.
In summary, the cap will apply, before tax, to:
voluntary and compulsory exit payments, including those made on redundancy;
ex gratia payments and special severance payments;
the monetary value of any extra leave, allowance or other benefits;
employer cost of funding early access to unreduced pensions;
payments made for contractual entitlements, eg payments in lieu of notice or accrued untaken holiday pay;
special severance payments;
formal redundancy payments
There will be a waiver of the cap for exceptional circumstances, with the consent of the relevant Minister, or where applicable, a decision of the council in relation to local government exit payments.
Payments made in respect of serious ill-health and ill-health retirements, and payments resulting from litigation for breach of contract or unfair dismissal, are excluded.
Organisations subject to the cap will be required to disclose records of all exit payments during the financial year.
The government intends to create further secondary legislation detailing the scope of the exit payment cap. They will also have powers to add and remove bodies from the scope on a case-by-case basis.
Unreduced Early Retirement Pensions
An important point to be aware of is that the cap will cover an employer's cost of funding early access to unreduced pension. This will have a major effect in circumstances where public sector employers are required to pay in to pension schemes (for example the Local Government Pension Scheme (LGPS)) in order to account for costs of early release of retirement benefits, for example where employees over 55 are being made redundant.
This will result in not being able to pay or having to squeeze own other types of settlement payments. The government acknowledged concerns about LGPS, but stated that it is fair to include these payments which will mean the cap is not avoided in these circumstances.
The government intends to introduce the proposals through legislation which is currently going through Parliament.