Enterprise

Written evidence submitted by Prospect (ENT 56)

INTRODUCTION

1. Prospect is an independent trade union representing over 113,000 professional, managerial, technical and scientific staff across the private and public sectors. Our members work in a range of jobs in a variety of different areas including in aviation, agriculture, defence, education, energy, environment, heritage, nuclear decommissioning and scientific research.

2. Our evidence to the Bill Committee is focused on the proposed cap on exit payments for public sector workers. This measure will impact on the compensation hundreds, or even thousands, of Prospect members receive on being made redundant as a result of public sector cuts or the successful completion of their work decommissioning sites on the nuclear estate.

3. Prospect acknowledges the Conservative Party manifesto commitment to "end taxpayer-funded six-figure payoffs for the best paid public sector workers". The Government has a mandate to restrict very large redundancy payments to high earners in the public sector. We believe that certain aspects of the current proposals go beyond this mandate, treat many employees unfairly and will result in practical problems for employers and pension schemes. As a consequence Prospect is asking the Bill Committee to accept reasonable amendments that address specific problems highlighted in our submission to ensure the proposed cap operates fairly and is in line with the manifesto commitment it is based on.

4. Unfortunately the Bill Committee is not taking oral evidence about the impact the Bill will have on many thousands of employees. Prospect recommends that members of the Committee speak to people affected about the impact the proposed cap will have on them, on their families and on their life plans. Prospect is happy to put members of the Committee in touch with Prospect members who can explain how the Bill will affect them.

5. Ahead of the debate on second reading of the Bill in the House of Commons, Prospect sent a briefing to all MPs. This document contains background information on the terms of redundancy compensation that apply to many Prospect members. It also gives some background to the process on agreeing those terms as well as comments on the consultation process in relation to this measure undertaken by Treasury and the debates on the proposed cap as the Bill progressed through the House of Lords. The briefing is available from:

https://library.prospect.org.uk//download/2016/00257.

SUMMARY OF PROSPECT’S POSITION

6. For the reasons outlined in this submission, Prospect is calling on the Committee to support amendments to Part 8 of the Bill that achieve four main aims:

(i) Removing the cost of early retirement from the calculation of the proposed cap so those with long service but on low or moderate earnings are not impacted.

(ii) Excluding employees of companies operated by the private sector from the scope of the proposed cap.

(iii) Protecting against the threat that government will impose a lower cap in the future through regulations and the risk that the level of cap will not be maintained in real terms.

(iv) Ensuring redundancy schemes already underway before the regulations the Bill provides for take effect are not interfered with retrospectively.

DETAILED COMMENTS

7. Prospect's case for amendments that achieve the above aims is set out in detail below. Our evidence also addresses issues that arose during the debate on second reading as well as the evidence base for this particular proposal and comments on the legal position.

- Debate on second reading in the House of Commons

8. In his only comments about the proposed cap on exit payments in his speech introducing the Bill to the House of Commons, the Secretary of State said: "Too many public sector fat cats are handed six figure pay-offs when they leave a job, which are often little more than a reward for failure." This was insulting to the hundreds of thousands of public sector workers who have been made redundant in recent years but, more importantly, it betrays a worrying level of ignorance about what this measure in the Bill will actually do in practice. It is unclear that the Secretary of State understands what the impact of the regulations Part 8 of the Bill provides for will be.

9. As has been consistently demonstrated at every stage this measure has been consulted on and debated, the proposed cap will impact on employees earning less than £27,000pa. It is inconceivable that the Secretary of State considers long-serving employees on salaries of these levels to be "fat cats"; as he surely did not intend to mislead the House about its impact it must be the case that he does not understand how the proposed cap will work.

10. It is unclear from his speech introducing the Bill that the Secretary of State even understands the purpose of redundancy compensation. Redundancy compensation is not "reward for failure". Money paid on redundancy is compensation for the loss of a job that is no longer required to be done. Not only is redundancy not related to poor performance in the role, in many of the areas covered by this provision of the Bill it can be a sign of success: Prospect members working in the nuclear decommissioning field are working diligently towards the loss of their own job when the site in question has been successfully and safely decommissioned. Appropriate levels of redundancy compensation are an important feature of long-standing agreements between these members and their employers designed to deliver outcomes that are of vital national importance. There is genuine anger amongst the tens of thousands of employees in this sector that, having honoured their side of these agreements, this Government is seeking to impose cuts to their terms and conditions through legislation. Poor performance in a role should be tackled by managing the employee in question; redundancy is not an appropriate response and redundancy compensation should never be used as "reward for failure".

11. In an intervention during the same debate the Minister for Small Business, Industry and Enterprise asked: "Does the hon. Lady accept that the exit payments will apply to only some 5% of workers, because we are talking about a redundancy payment of £94,000?" This was another unfortunately revealing insight into ministerial understanding of this measure. The proposal is not unfair because of how many workers it affects; it is unfair because of which workers it affects and why it affects them. The cap is not targeted at the top 5% of public sector workers by earnings; it is targeted at long-serving workers being made redundant at particular ages, often they are on relatively low or moderate salaries.

12. In summing up, the Minister addressed the issue of low earners being impacted by the cap: "What we do know is that there is a very small number of workers in the public sector on about £25,000 who could be caught by this. But those are extremely rare conditions." If the cap will only affect low or moderate earners in extremely rare conditions there can surely be no objection to accepting amendments that deal with these situations.

13. The Minister also hinted at a willingness to consider the issues relating to employees of companies operated by the private sector being in the scope of the cap: "On Magnox workers, I am more than happy to meet any Members to discuss this important issue in relation to them." Prospect wrote to the Minister immediately after the debate to request a meeting to explain the situation of employees of Magnox Ltd and other companies in a similar position, such as Sellafield Ltd, Westinghouse Springfields Fuels Ltd and AWE Ltd. At the time of submitting this evidence Prospect has not received an acknowledgement or a reply.

- Evidence base

14. In its consultation document, Treasury stated that between 2011-12 and 2013-14 the cost of exit payments in the public sector was around £6.5 billion . This illustrates the scale of departures from the public sector in this period. The document further states that £1 billion of the cost related to exit payments costing more than £100,000. Capping exit payments at £95,000 would obviously save much less than £1 billion because the vast majority of this amount would still be payable. A statement by the Chief Secretary to the Treasury indicated that he estimates the cap would have saved about £100 million per year if it has been in place over that period: "If the cap had been in force during the last Parliament, it would have saved £200 million in the two years between 2011 and 2013."

15. These estimates are obviously static forecasts of the reductions in compensation that would have applied if the cap had been in operation. In practice these are likely to overestimate the savings associated with the cap. This is because the operation of the cap is likely to have costs associated with the prolonging of redundancy exercises. Someone who may, for example, have been happy to volunteer for redundancy on early retirement terms may well not do so if the cap meant this was not possible.

16. Any delay in achieving the headcount reduction required of public sector employers will increase the cost of redundancy exercises. The inability to use early retirement in many cases will also cause problems for employers looking to use redundancy programmes to refresh skills bases and management structures. The amendments Prospect is calling for will deal with these behavioural effects and other issues while delivering the vast majority of the cost savings envisaged for the cap.

17. Far greater savings on redundancy costs are achievable by working with the employees concerned and their representatives to ensure redundancy exercises are undertaken as quickly and efficiently as possible. Early retirement can play an important role in this. The ability to offer early retirement is not only a matter of fairness; it will also result in savings and better targeted redundancy programmes.

18. The National Audit Office showed that changes to the civil service redundancy terms agreed by Prospect members in 2010 saved over £400 million in the first year they applied . The likely savings over the last Parliament were well in excess of £2 billion; this is for the civil service alone. Over 90% of Prospect members who voted, accepted these revised terms. Prospect members are not asking the Bill Committee to overturn the proposed cap; they are asking for amendments that would address unfairness in the current proposals while also addressing practical problems relating to its implementation.

19. In the context of the overall savings achieved through reform of the Civil Service Compensation Scheme or, indeed, even in the context of the anticipated savings the proposed cap will achieve, the estimated cost of the amendments Prospect is seeking is minor; if there is a cost at all.

20. The ability to offer early retirement terms on redundancy is not a public sector phenomenon. Prospect deals with many private sector employers who fund the same benefit on redundancy over minimum pension age because of the sound business reasons for doing this.

21. Since the Bill had its second reading in the House of Commons, Treasury has launched a consultation on further changes to public sector redundancy terms that would have the effect of reducing further the anticipated savings of the proposed cap (and hence any cost of not counting the cost of early retirement towards the cap) .

- Legal position

22. In the debate on report stage in the House of Lords, the Minister (Baroness Neville-Rolfe) stated in relation to the cap: "Any earned pension that has been accrued is untouched."

23. The Minister did not go into detail about the practical implications of this.

24. Many employees covered by the proposed cap are in pension schemes that offer, as of right, an unreduced pension from minimum pension age on redundancy. If accrued rights are protected, as the Minister stated (and as Prospect would go to law on behalf of any member affected to ensure), then this places the pension scheme in a difficult position. The pension scheme is obliged to pay the accrued benefit of an unreduced pension but, instead of being able to recover the cost of this from the employer, the scheme can only be paid £95,000 due to the cap on redundancy costs. This would weaken the security of the pension promise for all scheme members and would eventually have to be made good when the next scheme valuation was undertaken.

25. Removing the cost of early retirement from the calculation of the cap would resolve this absurd anomaly. Excluding private sector employers whose employees are in pension schemes that offer this provision would also address this issue.

26. When the revised civil service redundancy terms came into effect, the Minister for the Cabinet Office gave a commitment that any reductions to those terms would only follow consultation with members with a report to Parliament outlining what steps were taken to reach agreement on those changes . While Ministers may argue that the proposed cap is technically not a modification of the Civil Service Compensation Scheme, it has precisely the same effect and the failure of the Government to consult on this with a view to reaching agreement breaches the spirit of the Minister’s commitment and the Superannuation Act 2010.

- Suggested amendment 1: cost of early retirement

27. Prospect’s first suggested amendment is to remove the cost of early retirement from the calculation of the proposed cap so those with long service but on low or moderate earnings are not impacted.

28. This could be achieved by simply deleting this element of compensation from the list of payments that regulations would count towards the cap (ie delete (c) from the proposed 153A (5) to be inserted in the Small Business, Enterprise and Employment Act).

29. This amendment would bring the proposal into line with the manifesto commitment to cap exit payments for the "best paid". If this amendment is accepted the proposed cap will impact people earning £47,500pa or more (depending on the particular redundancy scheme that applies). If this amendment is not accepted the proposal will impact people earning as little as £25,000pa.

30. This amendment ensures that the cap is targeted at high earners rather than long-serving employees who happen to be made redundant at a particular age.

31. As argued above, this amendment would have little impact on the anticipated savings envisaged for the cap. Indeed, as part of a package of measures that resulted in more efficient redundancy programmes, greater savings could be achieved.

32. Retaining early retirement as an option for all, as this amendment would achieve, would enable employers to better target redundancy programmes in order to refresh management structures and skills bases.

33. As explained above, in many cases early retirement from minimum pension age is a right under the relevant scheme rules. Accepting this amendment would ensure there were no unintended consequences for scheme funding as employers would be allowed to pay the full cost to the relevant pension scheme.

34. Accepting this amendment would allow redundancy schemes in the public sector to reflect the reality that it is more difficult for older employees to find re-employment in an equivalent role at an older age.

35. This amendment would ensure that public sector redundancy schemes remain in line with usual practice in similar organisations in the private sector.

- Suggested amendment 2: excluding private companies

36. Prospect’s second suggested amendment is to exclude employees of companies operated by the private sector from the scope of the proposed cap.

37. This could be achieved by omitting the relevant employers from the schedule listing the organisations in scope of the cap in the regulations provided for by the Bill.

38. However Prospect members in these organisations have been extremely unsettled by the consultation process and the course the Enterprise Bill 2015-16 has taken to date. They would prefer to have assurances on the face of the Bill.

39. A new 153A (10) with renumbering could achieve this:

(10) Nothing in this section applies in relation to payments made by authorities listed in schedule 3.

40. This would also require a new schedule 3 listing employers such as Sellafield Ltd, Westinghouse Springfields Fuels Ltd, Magnox Ltd, National Nuclear Laboratory, International Nuclear Services, Atomic Weapons Establishment Ltd, Low Level Waste Repository Ltd, Dounreay Site Restoration Ltd, RSRL Winfrith, RSRL Harwell and any other employers in similar positions.

41. This amendment would bring the proposal into line with what Prospect members considered a cap on compensation for "public sector" workers would be. Employees at the above companies never envisaged the manifesto commitment applying to them.

42. More importantly this amendment would ensure the legislation does not override important agreements between private companies and their employees that play a significant role in industrial relations in this sector and are vital to delivering nationally important objectives such as the safe decommissioning of sites on our nuclear estate.

43. To take the example of the Lifetime Partnership Agreement that operates in Magnox Ltd. This agreement was vital to achieving the company’s aims through enabling it "to retain and motivate staff over a long period when they know their current role will eventually end". Overriding this agreement would be unfair to those employees who have kept their end of it. It would also increase costs as employees would not be able place any faith in agreements about compensation on successful completion of their decommissioning role and would either demand a premium on pay or simply take their valuable skills elsewhere causing employers to have to pay more to buy in or train up replacements.

44. It is clear that Treasury had little knowledge of the impact the proposed cap would have in these companies when it decided to include them in the scope of the proposal. The post hoc justification is that these companies are publicly controlled and receive their funding from the public sector. This ignores the nature of the many of the contacts involved. Many of these contracts incentivise delivery of the public sector’s requirement with a fee pool for incentivising performance. In many cases applying the cap will result in cost savings that will trigger payments from the fee pool and deliver nothing to taxpayers.

45. This amendment would also be in line with the treatment of employees of these companies for pension and other purposes. Treasury did not allow employees of these companies to remain in public sector pension schemes on privatisation; it is inconsistent to seek to seek to include them in the scope of a cap on exit payments for public sector workers.

46. An amendment excluding private companies operating in these areas should be accepted because it is unfair to include these employees in the scope of the cap and because it will result in better outcomes for taxpayers.

- Suggested amendment 3: maintain the value of the cap

47. Prospect’s third suggested amendment is to put a minimum value for the cap on the face of the Bill and to make provision for the cap to maintain its value in real terms.

48. Amending 153A (1) by inserting the words in red would achieve the first aim:

(1) Regulations may make provision to secure that the total amount of exit payments made to a person in respect of a relevant public sector exit does not exceed a maximum of no less than £95,000.

49. Amending 153A (9) to read as follows would achieve the second:

(9) (a) The amount for the time being specified in subsection (1) shall be increased by order every year by a revaluation percentage.

(b) The revaluation percentage to be specified is the percentage increase in the general level of earnings in Great Britain in that year.

50. These amendments are necessary because the cap has a significant impact on the terms and conditions of millions of employees. It is not acceptable for this government or a future government to reduce the level of the cap through regulation or to simply let it wither on the vine.

- Suggested amendment 4: avoid retrospection

51. Prospect’s fourth suggested amendment is to ensure redundancy schemes already underway before the regulations the Bill provides for take effect are not interfered with retrospectively.

52. A new 153A (2) (with renumbering) could achieve this:

(2) Regulations may not take effect before 1 April 2018.

53. A redundancy exercise can take many months to complete. This amendment would ensure that all programmes underway or in planning when the relevant regulations are laid are not interfered with retrospectively.

February 2016

 

Prepared 18th February 2016