Restriction of Public Sector Exit Payments Regulations 2020
(Limited Text - Ministerial Extracts only)
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Lord Agnew of Oulton
That the draft Regulations laid before the House on 21 July be approved.
Relevant document: 25th Report from the Secondary Legislation Committee
The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)
My Lords, each year, hundreds of millions of pounds are spent on exit payments to public sector workers that exceed £100,000. The money funding these payments comes from taxpayers. This statutory instrument will fulfil the Government’s 2015 manifesto commitment to end six-figure pay-offs by capping public sector exit payments at £95,000. This House discussed the proposals in great depth when considering the parent Act, the Enterprise Act 2016.
Public sector workers play a vital role in the running of our economy. Earlier this year, we accepted the recommendations of the independent pay review bodies and announced a significant, real-terms pay increase for around 900,000 public sector workers. For the majority, this was the third inflation-busting pay rise in a row. But we must ensure all aspects of public sector pay and renumeration deliver value for money for the taxpayer. It is our view that these large exit payments do not deliver that aim.
The coronavirus is having a very significant impact on the economy, labour market and fiscal position, and the Government will need to continue to take this into account in setting public sector pay and renumeration. Exit payments are important to an employer’s ability to reform and react to new circumstances. They are also an important source of support for individuals as they find new employment or as a bridge until retirement age.
However, these payments must be value for money and fair to the taxpayer. The high exit payments we have seen granted in recent years clearly breach this principle. That is why the Government are taking forward regulations to cap public sector exit payments as £95,000. The proposed cap, amounting to almost six times the maximum statutory redundancy payment entitlement, will still offer a significant level of compensation and support to employees.
The Secondary Legislation Scrutiny Committee noted these regulations as a statutory instrument of interest. I will address the points raised in its report. First, a number of bodies are exempt from these regulations. These include the armed services, the Security Service, the Secret Intelligence Service and the Government Communications Headquarters. This is appropriate due to their unique career requirements. Often, individuals working in these fields experience lifelong impacts, sometimes at early ages. It is right these individuals should be properly compensated, and their reward packages are typically designed to reflect that.
The regulations also outline which payments are deemed an exit payment for the purpose of the cap. The Government are clear that all payments conditional on an individual’s exit from employment must be in scope of the cap to avoid opportunities for manipulation, with a few exceptions. Payments such as death in service will not be capped and should be paid in full.
The second point raised by the Secondary Legislation Scrutiny Committee is that public sector pension schemes may need amending to account for these regulations. Where required, these changes are the responsibility of the parent department. Some of these amendments are already under way, with the Ministry for Housing, Communities and Local Government publishing its consultation on amendments to the Local Government Pension Scheme on 7 September this year.
Prior to amendments being made where the application of the cap would result in an employer being unable to make a pension strain payment due to pension scheme rules, it may instead pay the pension scheme member an equivalent cash sum. The aggregate of that cash sum and any other exit payments must not exceed the cap.
The Government accept that in some limited circumstances, it will be appropriate for employees to receive an exit payment that exceeds £95,000, including where imposing the cap would cause genuine hardship. To account for these circumstances, a waiver has been designed that ensures flexibility, while maintaining an appropriate level of scrutiny from Ministers.
Today, the Government are taking forward regulations that deliver a long-term manifesto commitment and ensure value for money for the taxpayer. The regulations do this in a proportionate and thorough way, while ensuring the flexibility to protect the most vulnerable. I beg to move.
Lord Agnew of Oulton (Con)
I thank noble Lords for their contributions to this debate, and I will seek to address their comments and queries in my closing speech.
The noble Baroness, Lady Bakewell, together with several other Peers, raised the issue of pension strain. All payments relating to exit should be in scope of the cap. The option of employer-funded early retirement is often the most costly element and is ultimately funded by the taxpayer. There is of course a difference between redundancy and early retirement, and I think they can often be conflated.
I will address the points on the impact assessment a little later. The noble Earl, Lord Devon, also raised the issue of pension strain, which I have addressed. The noble Lord, Lord McCrea, also mentioned the waiver system. This allows us to look at the application of the cap on a case-by-case basis to consider whether an uncapped exit payment would be appropriate, as I mentioned in my opening remarks. We have that there to ensure that there are not cases of genuine hardship.
The right reverend Prelate the Bishop of Worcester is concerned about lower-paid people. The guidance document outlines situations where the waiver system may be used. It explicitly states that the discretionary waiver may be exercised with the approval of the sponsoring department and the Treasury if capping a payment would result in genuine hardship.
The noble Baroness, Lady Falkner, asked about the BMA judicial review. It is now a matter subject to litigation so I am not able to comment. However, we have certainly considered the issues that have been raised on that; no doubt they will come out further in due course.
The noble Lord, Lord Wigley, again asked about the waiver. The power to waive the cap is delegated to the full council as the decision-maker for local government pay. If the full council approves a waiver case, sign-off is required from the Ministry of Housing, Communities and Local Government, and then the Treasury if the waiver is discretionary. We believe that the waiver system as currently designed is appropriate, as the Government need to maintain oversight of how the system is being used. Any cases put forward for relaxation will be considerable sums of money and need to be properly scrutinised. Of course, we will ensure that cases are processed in a timely manner.
The noble Lord, Lord Tunnicliffe, addressed a number of points. I reiterate what I said in my opening remarks: we are very grateful to public servants for the work they do. The noble Lord is correct that we are in difficult times at the moment and public servants have had to go beyond the call of duty on many occasions. However, these regulations are simply about ensuring that rewards and remuneration provide value for money by capping exit payments at £95,000. These payouts are funded using taxpayer money so it is right that we take action.
Since the beginning of the Covid-19 outbreak, the Government have agreed specific pay and pension packages for a number of public sector workforces—including the NHS—both to increase system capacity and, importantly, to recognise their work. As we respond to the financial impacts of Covid-19, the inappropriateness of large exit payments is reinforced. Ensuring that rewards are proportionate and taxpayer money is spent fairly must be prioritised.
Like many others, the noble Lord referenced the system—I hope that I have addressed this—in relation to the guidance and directions outlining the situations where the cap must be waived, including where a payment is made to settle a discrimination grievance, and where it may be waived, such as instances where implementing the cap may result in genuine hardship. Guidance and directions explaining the way the systems were published at consultation—and updated versions of these documents—will be published in due course.
Similarly, the noble Lord suggested that no equality impact assessment was undertaken. However, the Government did conduct and publish an assessment of the primary legislation. The previous impact assessment was linked to the 2019 consultation document. In addition, the 2019 consultation asked for comments and information related to impacts; an updated impact assessment has since been conducted based on the final regulations laid before Parliament and will be published in due course. We outlined this in the published consultation response.
As is also outlined in that response, we do not propose changing the level of the cap, as we still view £95,000 to be an appropriate level. However, the primary legislation allows for the figure to be changed in the future, taking into account the full contextual factors. The inclusion of the nuclear workers in the scope of these regulations has been debated extensively throughout the passage of the primary legislation and in a recent Commons Committee debate on Monday. I refer the noble Lord to Hansard, where some extensive passages deal with that.
We are able to exercise our own judgment, but, for the most part, the scope has been guided by the ONS, which makes objective judgments independently from these regulations. Based on the ONS classification, it is appropriate that the Nuclear Decommissioning Authority and its site licence companies are within the scope of these regulations. However, we have listened to concerns, and a mechanism to waive certain pension-related payments upon redundancy has been designed. This was agreed by the Treasury, BEIS, unions and the Nuclear Decommissioning Authority in 2017.
I believe that the Government are right to take this course. We are strongly of the view that these regulations will deliver value for money for taxpayers and put a stop to excessive payouts, which we have unfortunately seen too often in recent times. After a long period of consultation, it is now right that this policy comes into force.