As you may have seen in the news, out of the blue the government has performed a u-turn on the public sector pay cap. These are The Restriction of Public Sector Exit Payments Regulations 2020 which came into force on 4 November last year 2020 and set a £95,000 cap on exit payments. Technically the Regulations remain in force, but certain parts of the regulations have been disapplied by Directions issued by HM Treasury. It appears the policy intention is that the revocation will have retrospective effect back to 4th November although the Treasury guidance is not clear on that point. Why the u-turn? The Treasury says the cap may have had ‘unintended consequences’ although they have not explained what they mean by that.
This legislation was always highly controversial and was being challenged in the courts by way of judicial review. That was based on the impact the cap would have on the public sector pension scheme and was rolled up with separate challenges to the regulations by a number of trade unions plus the BMA, with a full hearing due in March. The sudden u-turn suggests the government had serious doubts about the strength of its case going into that hearing.
This has been widely covered in the press and Personnel Today quotes employment law consultant and commentator Darren Newman. He says 'A policy 5 years in the making has collapsed overnight. Government really needs to reflect on its refusal to listen to those advising them that the Regs were a mess.' He explains what he means on his own website. Essentially it's about the so-called 'pension strain' payment which caught up in the cap – that's a payment made by an employer to a pension fund to cover the additional costs of an employee who qualifies for enhanced benefits when taking early retirement and is very expensive for employers, often well in excess of £100,000. He makes the point that if the cap was ever going to work then the Local Government Pension Scheme would need to be changed first and that is something the government failed to understand, or ignored.
On Friday, when this news broke, the government published a guidance note which speaks to employers. It says 'employers are encouraged to pay to any former employees who had an exit date between 4th November and 12th February 2021 and to whom the cap was applied, the additional sums that would have paid but for the cap. Given that the cap has now been disapplied, it is open to employers to do so and HM Treasury’s expectation is that they will do so.'
So how are employers taking this news? Let's find out. On the line London-based Chris Evans:
Chris Evans: "The big issue for employers at the moment is it's caused a huge amount of turmoil as to what they should be doing going forwards. So when the regulations came in in November, they were obviously planning for the fact that exit payments would be capped at £95,000. The difficulty they've got is that they will have set budgets, particularly if they're running a redundancy exercise in light of COVID-19, which are all capped at the £95,000. Now, we're in a situation where the Treasury has effectively said the regulations no longer apply going forwards, so that they will need to reconsider their budgets and also potentially what exits they are making this year. Now, it's not only an issue in relation to what happens going forwards, they also need to be thinking about, well, what has happened in the past? So between November and February, there will undoubtedly have been a number of exits, which will have been made, presumably numerous under settlement agreements, which will now have to be unpicked to determine whether they need to pay above the £95,000 cap. Now, in circumstances where we have a binding settlement agreement, I'm sure we'll be having a large number of employers saying well, why should we pay over and above the 95,000? Now, the difficulty with that is that the Treasury has issued guidance, which effectively says that there is an expectation that if staff haven't been paid above the £95,000, because of the regulations, they should be topped up, but in circumstances where there is a binding agreement it will obviously be difficult to explain as an employer internally why that payment ought to be made. Now, there's a rub here effectively between both the expectations of the Treasury and also internal financial prudence and if in circumstances they don't look to pay above the cap, in circumstances where the Treasury says there is an expectation, I can very well see there being satellite litigation coming from that in order for trade unions and employees to seek those unpaid payments between those few month periods."
Joe Glavina: "Doubts remain about the lawfulness of the cap and we don't know for sure whether the revocation will have retrospective effect. Very messy."
Chris Evans: "Absolutely, and you could very well see this ending in, you know, extremely expensive litigation as to were the contract settlement agreement contracts entered based on regulations which were unlawful, for example? You've also got the question as well as to will public sector organisations look to take such a bold stance, and I very much doubt from experience that they will. The majority will be Secretary of State controlled, or shareholder at very least, and on that basis they will be wanting to be seen to be doing the right thing and I think in circumstances where we have such clear guidance from the Treasury that there is this expectation of repayment I imagine very few public sector employers will be taking the point, particularly in circumstances where it's going to generate such significant employee relations and potential union activity if they don't follow the Treasury guidance. But the difficulty I see though, is that what we have going forward is a rather uncertain territory. So the guidance, whilst they say that there's an expectation of repayment, it is nonetheless clear that they're looking to introduce new proposals and what they describe as being ‘brought in at speed’. Now, the difficulty is we don't know what those proposals will be, and in circumstances where, for example, employers may have taken remedial action when the regulations came in to amend contracts or to amend policies such that it's clear that this £95,000 cap applies, it puts them in a state of limbo because they don't know what to do going forwards but yet they've got this expectation from the Treasury that actually they will pay above the £95,000 cap because the regulations are going to be revoked and indeed there is a Treasury Direction disapplying the regulations going forwards until they can be revived. So it creates a hugely uncertain territory for public sector employers and regardless of what they do they will be in difficulty either from a financial perspective because they haven't budgeted for it or from an employee relations perspective because they're not abiding by the expectations of Treasury in terms of repayment."
The Treasury's guidance note on the 2020 regulations was published last Friday following that decision to revoke the pay cap. Chapter 3 contains a link which gives the list of employers or public bodies affected by this. We have put a link to the guidance in the transcript of this programme. Meanwhile we will, of course, be tracking what happens next very closely.
- Link to Treasury guidance on The Restriction of Public Sector Exit Payments Regulations 2020