A severance policy for Scotland: consultation

2 Background

2.1 UK Government reforms and Scottish Ministers' powers

The UK Government's reform of public sector exit payments includes: the ending of six‑figure exit payments for public sector workers by capping the total cost of an exit payment to £95,000; and the recovery (clawback) of public sector exit payments when a high earner (defined as someone who was on a salary of £80,000 or more) returns to work in the public sector within 12 months, based on the premise that it is right to examine whether there is sufficient assurance to the taxpayer that these exit pay arrangements are fair and represent value for money.

The UK Government is likely to deliver some of these reforms through regulations under the Small Business, Enterprise and Employment Act 2015 ("the 2015 Act"). The Scottish Ministers have powers under the 2015 Act which enable them to make Regulations on whether to cap and/or recover exit payments in the devolved sector. These add to existing controls over exit payment terms for that sector. The Scottish Government is under no obligation to use the 2015 Act powers.

Furthermore, the UK Government initiated a cross public sector reform of exit payment (severance) terms with the aim of reducing costs of redundancy payments and ensuring greater consistency between workforces. This UK Government initiative does not extend to the devolved public sector.

2.2 Changes to Civil Service Compensation Scheme

Changes to the exit payment terms of the Civil Service Compensation Scheme have already been made. The exit cap will come into force for most staff covered by the Civil Service Compensation Scheme when relevant Regulations are made by a UK Minister. As the terms of the Civil Service Compensation Scheme are reserved to the UK Government, changes to it apply to around 19,200 civil servants working for the Scottish Government and to those working for devolved Scottish bodies who elected to be part of the Civil Service Compensation Scheme.

2.3 Fair Work

The Scottish Government is committed to ensuring severance packages are fair and equitable while also providing value for money for the people of Scotland. Exit payments associated with the loss of employment are an important part of an employer's ability to flex their organisational structure to react to new circumstances and they also provide important support for employees as they find new employment. All such compensation arrangements should be proportionate and offer value for money.

Public sector workers play a crucial role in delivering services essential for the country and supporting our economy. The Scottish Government supports the independent Fair Work Convention's vision to embed a culture of fair work throughout all workplaces in Scotland and is committed to being an exemplar of fair work itself. The Fair Work Convention's Framework recognises fair work as that which offers effective voice, opportunity, security, fulfilment and respect. For employees, fair work brings increased financial security, better physical health and greater psychological wellbeing. Employers will, in turn, see less absence, greater productivity and enjoy a good reputation as a fair employer.

2.4 Exit payment value for money and affordability

As part of the Scottish Ministers' commitment to no compulsory redundancy, employers make every effort to find alternative employment for employees as part of re‑shaping workforces to support service delivery or underpin public service reforms. Where this is not possible they offer voluntary exit schemes.

Exit payments should represent value for money to the tax payer, be affordable to the public purse and facilitate the sustainable delivery of public services through an engaged, committed and flexible workforce. Exit payments help unlock substantial reductions in staff costs in the medium to long term which are needed to meet the continuing challenge of budget pressures across the public sector. In most cases, the cost of this exit payment is recovered from the year‑on‑year savings from no longer paying salary for such posts.

In 2013, the Audit Scotland report Managing Early Departures from the Scottish Public Sector acknowledged that

"voluntary exit schemes can provide significant savings and that public bodies generally provide good practices".

Given the scale of costs associated with the exit payments it is vital that they continue to offer best value. The Audit Scotland report also commented

"there is evidence to show that Scotland's public sector generally follows the principles of good practice. Many have up‑to‑date policies on their early departure schemes. Wider workforce strategies are used by organisations to help decide where they need to reduce staff numbers or which grades they need to reduce. Most use some form of business case to help decide if early departure will lead to savings." ('Key Messages', page 4)

Ensuring that exit packages offer flexibility to employers, support to employees and value for money to the taxpayer, are key drivers of any decision around the implementation of an exit cap or recovery arrangements.

2.5 Devolved powers over exit payment caps, recovery and reform of payment terms

Under these powers, Scottish Ministers can decide whether to adopt an exit payment cap and/or recovery measures similar to those being implemented by the UK Government or set a different level of cap and/or salary ceiling in relation to recovery provisions. They could also specify the types of payments to be included in that cap and/or recovery provisions.

In addition, the Scottish Ministers could choose to delegate powers to a body in respect of exit payments made by the body or to exempt particular bodies or sectors from the cap or recovery measures.

The table below provides the underpinning policy approach being taken by the UK Government in applying exit payment cap (to the total cost of exit payments to the employer) and recovery provisions as well as outlining their approach to reforming exit payment terms.

UK Government Policy Position
Exit Payment Cap	Cap the total cost of exit payments available to individuals leaving employment to £95,000 Apply the cap to all types of arrangements for determining exit payments To cover payments made in relation to leaving employment including: Voluntary and compulsory exits Other voluntary exits with compensation packages Ex gratia payments and special severance payments Other benefits granted as part of exit process that are not payments in relation to employment Employer costs of providing early unreduced access to pensions (or any form of pension 'top‑up') Payments or compensation in lieu of notice and cashing up of outstanding entitlements Where a number of payments are made these will be aggregated together to be measured against the cap Payments out of scope Compensation payments in respect of death or injury attributable to the employment, serious ill health and retirement and certain fitness requirements Payments made in compliance with an order of court or tribunal Relaxation process The relaxation of the cap would require consent from relevant Minister Full council to take decisions on waiver in cases involving local authorities Compliance and transparency Requires bodies to maintain records and publish annual details of all exit payments relaxed within a financial year
Recovery of Exit Payments	Exit payments are recovered on return to any part of the public sector, including for members of the Civil Service Compensation Scheme in Scotland and reserved public sector in Scotland The minimum salary at which recovery of exit provisions apply is £80,000 per annum Exit payments recovery will be tapered from date of exit up to 12 months. None after 12 months Payments included for loss of employment, including discretionary payments and to buy-out actuarial reductions to pensions and severance payments Excluded payments Potential if not actual monetary value Payments and compensation in lieu of notice Payments equal to minimum statutory redundancy Payments made in respect of incapacity or death as a result of accident, injury or illness Payments made in respect of leave not taken Payments made in compliance with an order of court or tribunal Mechanism for enforcement are that former employer is entitled to take an individual to court to reclaim money. Transparency - bodies that grant a waiver disclose this as part of annual reports and accounts
Exit Payment Terms	A maximum tariff for calculating exit payments of three weeks' pay per year of service. Employers could apply tariff rates below these limits A ceiling of 15 months on the maximum number of months' salary that can be paid A maximum salary on which an exit payment can be based, as a starting point of the NHS scheme salary limit of £80,000 A taper on the amount of lump sum compensation an individual is entitled to receive as they get closer to pension age Act to limit or end employer‑funded early access to pension within exit packages. Proposals could be: Cap the amount of employer funded pension 'top‑up' payments to no more than the amount of the redundancy lump sum to which that individual would otherwise be entitled To remove the ability of employers to make 'top‑up' payments altogether Increase the minimum age at which an employee is able to receive an employer funded pension 'top‑up', so that this minimum age is closer to or linked to Normal Pension Age Payments in Scope General limits would be imposed on most employer‑funded payments made in relation to leaving employment, including compensation packages for exits whether in impending or declared redundancy situations or in other situations where individuals leave the public sector employment with an employer‑funded exit package Any increase in the minimum age at which an employee might be able to receive a pension 'top‑up' on voluntary or compulsory exit may apply to payments under the major public sector compensation or schemes These reforms will not affect any payments made in relation to death or injury attributable to duty or ill‑health retirement.

2.6 Definition of exit payments related to severance

Exit payment is the term used within this document to refer to any financial or non‑financial transfer to an employee or employer which does not represent remuneration for normal on‑going activities that are part of their employment. This excludes, for example: wages, salary, allowances and regular non‑financial benefit packages such as a company car.

Exit payments may come in a number of different forms including (this list is not exhaustive):

• Cash lump sum- such as a redundancy payment, normally calculated on the basis of salary at the point of exiting the organisation and length of service
• Early access to unreduced pension- some employers offer the option for employees who have reached the relevant age to take early retirement on an 'unreduced' pension, in place of, or in addition to, a cash lump sum compensation payment. In these instances, employers bear the cost of 'buying out' the actuarial reduction that would normally apply to a pension that was taken early
• Non‑financial and other benefits- in a smaller number of instances employers may offer other benefits such as additional paid annual leave at the end of an individual's employment
• Payments in lieu of notice - employers may also offer a cash payment equivalent to the sum that would otherwise have been earned had a notice period been worked by the employee

2.7 Aim of the consultation - policy options

The Scottish Government recognises the role of severance arrangements in enabling organisations to re-shape workforces and ensuring continued delivery of flexible and responsive public services. At a time when budgets are under pressure and as part of their continued commitment to fair work, Scottish Ministers are considering whether there is a case for reform of severance arrangements across the devolved public sector.

The Scottish Government is not consulting on the basis of a preferred way forward, but instead wishes to ensure that decisions about a Scottish Approach to future policy are informed by as many voices as possible. This consultation seeks to explore four broad policy options:

Option 1 Status quo

Current compensation arrangements meet best value and deliver against fair work principles, accepting a level of continuing variance of practice across workforces that reflects the devolution of responsibilities to individual sectors and employers; or

Option 2 Non‑legislative change

Consider reforms to current devolved compensation arrangements that would improve value for money and the delivery of fair work principles but which do not require the use of powers conferred on Scottish Ministers by the 2015 Act; or

Option 3 Replicating UK arrangements

Agree to make reforms along the lines of the UK Government proposals: to implement a £95,000 exit payment cap; recovery of exit payments where someone earned more than the £80,000 threshold and returned to work in the public sector within 12 months; and make changes to exit payment terms; or

Option 4 A hybrid approach

Agree to reform using the powers conferred on Scottish Ministers and implement a hybrid of legislative and non‑legislative change which could, for example, strengthen existing severance arrangements and/or introduce some form of different cap and/or recovery arrangements.

In taking forward these four options, consideration will be given to the impact that changes to compensation arrangements can make on the following factors:

• Industrial relations and Fair Work principles
• On delivering flexible and responsive public services
• A desire to ensure that severance payments are not excessive and offer value for money
• Ability to ensure there is greater consistency of application across sectors, including between the reformed Civil Service Compensation Scheme and devolved schemes, where that is seen to be valuable
• Ability of employers to continue to re‑shape organisations and deliver services
• The risks and opportunities presented by taking different approaches where there is a UK‑wide labour market

Your response to this consultation will help Scottish Ministers to consider whether reform of severance arrangements across the devolved public sector is required and, if so, which policy option should be developed by Scottish Ministers.

We are particularly interested in hearing from:

• Public sector employers and their representative associations
• Employees and their representative bodies
• Members of the academic community with expertise in this area
• Pay, pension, remuneration and HR professionals in both private, public sector and third sector.

Following any decision to make changes to current severance arrangements, we will seek further engagement with workforces across the devolved public sector on the implementation of these changes.

2.8 Which bodies are in scope

All devolved public sector bodies (employees and office holders) are in scope. There is a list of entities classified as within the central and local government and non‑financial public corporation sectors by the Office for National Statistics for National Account purposes, on which the UK Government base their scope for capping and recovery (subject to exemptions).

The list includes the main bodies listed below;

• Non‑Departmental Public Bodies (who are not part of civil service pension arrangements)
• 22 NHSScotland bodies
• 26 Further Education institutions (colleges)
• 32 local authorities
• Police Scotland and the Scottish Police Authority
• Scottish Fire and Rescue Service
• 6 public corporations

Furthermore, a number of new bodies will be established after 1 April 2017 and any provisions may also cover them.

The list of bodies can be found on the Office for National Statistics website at: www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/datasets/publicsectorclassificationguide.

Question 1

What types of bodies or bodies themselves do you think should be covered?

Please give reasons for your response.

Question 2

What types of bodies or bodies themselves do you think should not be covered?

Please give reasons for your response.

2.9 Bodies covered by reserved arrangements

Devolved public sector bodies employing civil servants or those who do not employ civil servants but whose staff are part of the civil service pension arrangements will be subject to Civil Service Compensation Scheme rules set by the UK Government. Such bodies would not be affected directly by the findings of this consultation and any future policy decisions. However, we recognise that these bodies will have an interest in the consultation and severance and would welcome their contribution.