Consultation on termination payments raises questions for contractors regarding pension costs

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Consultation on termination payments raises questions for contractors regarding pension costs

Published On: 17 August 2015

The Government is currently consulting on a proposal to impose a £95,000 cap on the total amount of redundancy and other exit payments that an individual can receive on leaving a public sector employer. The proposal will also affect some of the benefits provided under the Civil Service, Teachers, NHS and Local Government Pension Schemes.

Payments made by an employer to fund serious ill health and ill-health retirement would be excluded from the cap. Any waiver of the cap would require consent from the relevant Minister, or from the Administering Authority in the case of local government pension scheme "exit" debts.

At the moment Local Government Pension Scheme regulations allow for payment of an immediate pension, with no reduction for early receipt, for members aged 55 and over whose employment is terminated on the grounds of redundancy or business efficiency. The actuarial "strain" cost of that early retirement pension is normally met by the employer. The consultation proposes that the total employer cost of that pension would be added to any lump-sum redundancy payment the employee might receive when assessing whether the £95,000 cap had been reached.

The proposal to some extent reflects current practice under the NHS Pension Scheme, where the cost of funding an unreduced early retirement pension is met (as far as possible) through an individual's redundancy entitlement, and if that sum is insufficient the pension to be provided will only be partially unreduced (unless the individual has a separate contractual entitlement for their employer to make up any funding shortfall to meet the cost and ensure the pension is completely unreduced).

However, under the Consultation proposal the position of employees who have already been outsourced (or otherwise transferred) from the public-sector remains unclear. The consultation states that "depending on final decisions, the policy may also have an impact on bodies employing staff previously from the public sector...these impacts cannot be quantified at this stage."

Outsourcing contracts usually address which party takes on the liability for such pension strain payments – in practice this often falls to the contractor. However if the cap applies only to public-sector employers there is a possibility that any strain cost for providing unreduced early retirement pensions that exceeds the cap may still fall on contractors, with the questionable outcome of making transferred employees better off than employees remaining in public-sector employment.

Clients who provide services to the public sector may well wish to lobby for the £95,000 cap to apply to their ex public sector staff.

Conclusion

The consultation, which closes on 27 August 2015, can be found here.

If there is any element of the Consultation you would like to discuss, or  you have any views on this issue that you would like DAC Beachcroft to submit to the Consultation on your behalf, please contact Neil Bhan.

Nick Bhan, Head of Public Sector Pensions
T: +44 (0)20 7894 6512
E: nbhan@dacbeachcroft.com

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