A severance policy for Scotland: consultation

3 Severance arrangements across the devolved public sector in Scotland

In assessing the case for reform, understanding the effectiveness of the current landscape can provide clear indicators on whether or not change is required and, if so, where any change is necessary.

This section of the consultation document sets out the current severance landscape, across the devolved public sector in Scotland. This includes what controls are in place for severance arrangements, the terms of severance schemes, costs and savings of exits and outlines the length of service and pay bands of those who have exited.

Control of severance schemes in the devolved public sector

3.1 The Scottish Public Finance Manual

Severance payments in bodies accountable to Scottish Ministers must comply with requirements in Scottish Public Finance Manual. Scottish Ministers, sign‑off exit payments in such bodies. The Scottish Public Finance Manual emphasises the need for economy, efficiency and effectiveness, and promotes high standards of propriety.

In considering terms for settlement agreements, severance, early retirement or redundancy packages - whether compulsory or voluntary - public bodies to which the Scottish Public Finance Manual applies should ensure that issues of legal and regulatory compliance, propriety and value for money are fully taken into account, alongside employee relations issues:

• In order to secure voluntary resignation of an employee out with an existing or approved scheme, any voluntary exit or other severance (including settlements) a business cases needs to be submitted and approved by the Scottish Government.

• In arriving at a decision on approval the Scottish Government will consider comparability to Scottish Government equivalent schemes and to the overarching Civil Service Compensation Scheme rules currently in force, along with an assessment of the regularity, propriety and value for money offered by the proposals.
• The benefit structure and terms of compensation schemes for severance, early retirement or redundancy provided by Scottish Government sponsored bodies - or separately by any constituent parts of the Scottish Administration - should be broadly similar to the arrangements in place within the core Scottish Government and set out in the Civil Service Compensation Scheme - as amended or replaced periodically.
• The public body must obtain prior approval from the Scottish Government for a new scheme or changes to a previously approved scheme.
• Comply with specific requirement to disclose remuneration relating to exit costs in annual accounts.

The Scottish Government made improvements to the regulation of severance payments in the public sector following the Audit Scotland report in May 2013. This included bringing more public bodies within the scope of the Scottish Public Finance Manual.

For those organisations that are not subject to the Scottish Public Finance Manual, such as local authorities, the Scottish Government expects them to meet their duties to deliver best value while also ensuring fairness to their staff.

In local authorities, decisions on exit payments are reported at a full council level annually, with reports providing information on the costs and savings of all exit payments. The Local Government in Scotland Financial Overview Report 2015‑16 by Audit Scotland acknowledges the role exit packages play in managing workforces and stated:

"Councils' decisions on reducing their workforce numbers through exit packages are supported by business cases which set out the associated costs and potential savings. Councils will typically expect to recoup the costs and start making savings within a few years." (page 18)

3.2 Existing severance schemes by workforce

This section of the consultation sets out key details of the severance schemes by workforce. This was provided using data gathered from across the devolved public sector prior to this consultation.

NHSScotland - covered by the Agenda for Change terms and conditions. All severance schemes are on a voluntary basis and based on an individual's contractual terms and conditions.

• Number of weeks' pay: One month's pay for each year of NHS service, up to a maximum of 24 years (giving a maximum of 104 weeks).
• Voluntary early retirement (access to pension): At the employer's discretion, employees may also be offered early retirement in the interests of the efficiency of the service. In these situations, the employer covers the costs of providing full pension benefits early.
• Payback period: A key affordability indicator (how long it takes to re coup the costs of the exit) the majority of NHSScotland bodies use a payback period of between one and two years, with some having either a case by case payback period or no formal payback period in place.

Police - both Police Scotland and the Scottish Police Authority are covered by the same severance arrangements. Severance schemes only apply to police staff and not police officers.

• Number of weeks' pay: For voluntary redundancy: A maximum of five weeks' per year, up to a limit of 66 weeks and a maximum lump sum of £10,000.
• Voluntary early retirement (access to pension): After the age of 50, employees receive an employer 'top‑up' of up to four compensatory added years to pension as well as a service based lump sum up to a maximum of 30 weeks.
• Payback period: Both Police Scotland and the Scottish Police Authority use a payback period of three years.

Local Government and Teachers - covered by similar severance policy, although some differences exist in their pension arrangements. A recent survey undertaken by Fife Council into local government severance schemes indicated some variance in practice in the terms of the scheme.

• Number of weeks' redundancy pay: 76 per cent of respondents (to the data gathering exercise) used between 30 and 66 weeks' pay to calculate an exit payment with 24 per cent above this threshold. The highest number of weeks' pay was 82.
• Voluntary early retirement (access to pension): 75 per cent of respondents give employees exiting in such circumstances Compensatory Added Years (this is a discretionary element of exit payments i.e. 'top-up'). Of the councils offering added years: 11 gave up to five added years, with seven councils offering six added years.
• Payback period (value for money test): Used by all local authorities. The majority of which (75 per cent) used a payback period of between two and three years. Five councils have a payback period of up to five years, or on a case by case basis.

Uptake of voluntary early severance / voluntary early retirement can be a concern for employers seeking to re‑shape their workforce. Although employers' views on uptake were generally positive, with over 80 per cent saying they felt they could "attract sufficient volunteers to meet required workforce reductions at present and in future, based on projected needs". (Fife Council survey results)

Some councils expressed concern for the future and the need to balance the ongoing cost of schemes against the need for them to remain sufficiently attractive to manage workforce reduction consensually. (Fife Council survey results)

Further Education sector - all severance schemes are overseen by the Scottish Funding Council.

• Number of weeks' pay: There is a variation between 30 weeks' pay (statutory) with a maximum of 60 weeks' pay recorded.
• Voluntary early retirement (access to pensions): Practice varied across respondents with the majority saying that they did not offer this. Those who did offer early access to unreduced pensions did so, where pension rules allowed.
• Payback period: Almost all colleges who responded used an payback period of between one and two years. Very few colleges have a payback period of either 18 months or a maximum of three years.

Non‑Departmental Public Bodies, public corporations and the Scottish Fire and Rescue Service - there are variety of arrangements in place. All severance schemes are on a voluntary basis and agreed by the Scottish Government.

• Number of weeks' pay: Across public bodies who responded there is a variation between 30 weeks' pay (statutory) with a maximum of 104 weeks' pay.
• Voluntary early retirement (access to pensions): Practice varied across bodies with the majority of respondents saying that they did offer this, with similar provisions as in local authorities.
• Payback period: Almost all bodies who responded used a payback period of between one and two years. Very few bodies had a payback period of either 18 months or a maximum of three years.

In some circumstances, there was no qualifying period for voluntary severance set out and in all circumstances there are no recovery of exit payment arrangements in place.

Question 3

Given the variation exit in schemes across the public sector, is there benefit in seeking to make this more consistent to deliver best value and Fair Work outcomes? Yes / No

Please give reasons for your response.

3.3 Exit payment costs

To inform the consultation, Scottish Government officials gathered data on exit payment activity across the devolved public sector, using a number of different methods. One data source utilised a pre‑consultation data gathering exercise (response rate of 77 per cent)which sought details on severance schemes, number and value of exits by salary band and length of service from a range of devolved public bodies, including Health bodies, Non‑Departmental Public Bodies, Police Scotland the Scottish Fire and Rescue Service and the Further Education (college) sector. Separately, additional data was sourced from NHSScotland Annual Accounts and received from Audit Scotland in respect of local authorities. This provides an indicative picture of exits in the devolved public sector.

From the results of the data gathering exercise, between 2014‑15 and 2016‑17, the indicative cost of exits across the devolved public sector showed over 1,000 voluntary early severance / voluntary early retirement cases reducing to 264, with related costs coming down from £46 million to £11 million.

From Table 1, in 2015‑16, only 17 out of 560 exits (around three per cent) cost employers over £100,000.

Table 1 Number of exits by cost band 2014‑17 (excluding local government)

Exit cost by band	2014‑15	2015‑16	2016‑17	Total exits by cost band
< £10,000	119	95	36	250
£10,001 -£49,999	727	348	165	1,240
£50,000 - £99,999	143	100	43	286
>£100,000	76	17	20	113
Total	1065	560	264	1,889

Source: Scottish Government data gathering exercise and NHSScotland Annual Accounts

Local Government information sourced did not break down exits using the exit cost band summarised above and therefore were excluded from this analysis

Table 2 Number and cost of exits by sector 2015‑16

Devolved public sector body	Number of exits	Total cost £	Average cost £
Police	111	6,244,074	56,253
Further Education colleges	171	4,979,913	29,122
NHSScotland	159	6,140,000	38,616
Public bodies ( NDPBs, public corporations, SFRS)	119	4,686,555	39,383
Local government	2,660	97,142,387	36,520
Total	3,220	119,192,929	37,016

Source: Audit Scotland, NHSScotland and Scottish Government data gathering exercise

Table 2 above shows the average exit payments by sector with an overall average exit cost of £37,016.

Furthermore, when adding local government exit payment data we can see total costs of exits rise to £119 million. It is important to note that local government exit costs are proportionate to the volume of exits that occur in that sector.

3.4 Salary and length of service indicators

An issue which could be raised in relation to an exit payment cap is whether longer serving, mid‑ to low‑income employees could be impacted unfairly by the introduction of any cap. For instance, if the calculation of the exit payment for a low‑income, long‑serving employee breached a cap on exit payments.

An examination of the distribution of exit payments across the public sector is provided below. This gives an indication of the proportion of longer serving employees more likely to exit and be impacted by a cap if it were to be introduced.

Table 3 Number of exits by length of service 2015‑16 (excluding local government)

Length of service at exit	10 years or less	11 to 20 years	21 to 30 years	31 to 40 years	More than 40 years	Total
Police	45	36	24	6	0	111
Further Education colleges	62	61	38	10	0	171
NHSScotland	16	44	29	18	5	112
Public bodies ( NDPBs, public corporations, SFRS)	36	44	27	5	7	119
Total	159	185	118	39	12	513

Source: Scottish Government data gathering exercise only

The data from Table 3, suggests fewer than ten per cent of all exits (excluding local government) occur where employees have more than 30 years' service.

Table 4 Number of exits by salary at exit 2015‑16 (excluding local government)

Salary band (£)	0 to 22,000	22,000 to 43,429	43,430 to 69,999	70,000 to 99,999	100,000 to 149,999	150,000 to 199,999	More than 200,000	Total
Police	49	55	7	0	0	0	0	-
Further Education colleges	53	98	19	*	0	0	0	-
NHSScotland	13	52	33	8	5	*	0	-
Public bodies ( NDPBs, public corporations, SFRS)	38	51	24	*	*	0	0	-
Total	153	256	83	12	*	*	0	513

Source: Scottish Government data gathering exercise only

Note: Counts of less than five have been suppressed and shown as * to prevent the possible disclosure of information about individuals. Secondary data suppression has also been necessary to prevent the calculation of the suppressed values by differencing (also shown as *)

The data in Table 4 suggests less than three per cent of exits exceeded the £80,000 threshold beyond which recovery arrangements might begin.

Equally, this data suggests the overall picture in the devolved public sector in Scotland is one where there are fewer exits in long serving or high earning employees.

3.5 Severance payments associated with pension

Individuals in the public sector who have reached the required age may be offered, or in certain circumstances have a contractual entitlement to, early retirement on an 'unreduced pension' or be provided additional pension. Employers making this offer as part of early retirement may make a contribution ('top‑up') to an individual's pension that 'buys out' some or all of the reduction in pension benefits.

Pension costs related to early exits could, therefore, be included which would mean more members of the workforce would be caught by a cap.

3.6 Existing recovery arrangements

Currently some public sector bodies can choose to include recovery measures (including limitations on return to work) in the design of their severance schemes. For example, NHSScotland has recovery arrangements, whereby if an individual secured employment elsewhere within NHSScotland, within four weeks of receiving a payment the previous employer would seek recovery.

While some public sector bodies do not re‑engage the services of former employees, this is only within their own organisation. It is therefore difficult to assess the number of instances of re‑engaging former employees shortly after receiving an exit payment across the sector as a whole.

There is not a requirement for recovery measures to be applied consistently across the devolved public sector in Scotland.