Enterprise Bill

Written evidence submitted by ALACE (the Association of Local Authority Chief Executives and Senior Managers) (ENT 60)

ENTERPRISE BILL (HL)

ALACE (the Association of Local Authority Chief Executives and Senior Managers) is a registered trade union whose approximately 300 members comprise heads of paid service and other senior managers in local authorities throughout the UK, and other agency chief executives associated with local government. The Council of ALACE forms the staff side of the Joint Negotiating Committee for Chief Executives, the body responsible for the salary and terms and conditions of employment for chief executives. The Association also represents the interests of its members in responding to draft legislation and regulations which affect the role of the head of paid service and other senior officers, together with issues such as the reorganisation of local government.

Introduction

1. ALACE’s members - and many other staff in local government - would be affected by the proposals in Clause 35 of the Enterprise Bill in respect of restriction on public sector exit payments. ALACE therefore welcomes the opportunity to give evidence on the restriction on public sector exit payments, and we hope that Members of the Committee will give careful consideration to the impact this Clause may have.

2. ALACE is particularly concerned with the detail of the proposed cap on public sector exit payments. We recognise that the Government can claim an electoral mandate for "[ending] taxpayer-funded six-figure payoffs for the best paid public sector workers." (p.49 of the Conservative manifesto for the General Election, 2015). However we believe that the Government’s detailed proposals go beyond what most people would have understood the Manifesto to have meant; and that they give rise to significant transitional and other issues that the Government has not addressed or explained.

CLAUSE 35: RESTRICTION ON PUBLIC SECTOR EXIT PAYMENTS

3. ALACE echoes the concerns expressed by UNISON and others that these proposals will significantly hinder negotiations and agreements necessary to public service reorganisations and proposed "efficiency savings". They will also have a negative impact on employer flexibility, industrial relations and staff morale at a time of huge change.

4. We share UNISON’s concern (set out in their written evidence to the Committee) that the proposals in the Bill will affect many staff on low to moderate salaries if they have given long service to the public sector. We also believe that the proposals would have an unjustified and unduly punitive effect on higher paid staff by including pension strain payments within the definition of exit payments.

5. The proposals in the Bill to cap public sector exit payments conflate two different sets of circumstances through which staff are compensated for leaving a job: those where organisations use a payment as an alternative to legal claims (early conciliation), and those where jobs are removed and staff are made redundant.

6. Early conciliation is generally used in situations where an employer would otherwise need to respond to litigation. The Government recently introduced a mandatory legal duty to attempt early conciliation prior to engaging in Employment Tribunals in recognition of the burden such tribunals place on employers and employees alike - not least the financial burdens of the litigation process itself.

7. The proposals as they stand seem to conflict directly with the Government’s recognition and promotion of the many benefits of early conciliation settlements. The concern is that to place a cap on settlements made by means of the early conciliation process would create a perverse incentive for employees to avoid settlement at that stage.

8. This seems completely at odds with the Government’s desire to reduce red tape and regulations, leading to an increase in litigation, bureaucracy and administration costs which would have to be funded by taxpayers.

Summary of changes ALACE is seeking

9. ALACE would like to see the following changes made to the Bill:

(a) ideally, payments made by an employer to a pension fund in order to reduce or eliminate an actuarial reduction to a pension on early retirement ("pension strain") should be excluded from the exit payment calculations altogether.

(b) if exclusion of pension strain payments is not possible for reasons that the Government needs to explain, then the way in which such payments are taken into account needs to reflect that they are not cash sums paid to individual employees and that there are fairer ways in which they might be taken into account in calculating whether the limit on an exit payment has been reached.

(c) the inclusion of a mandatory mechanism for index linking the £95k limit in line with a recognised index of pay and prices.

(d) the power for a full meeting of a local authority to waive the limit in any individual case should be written onto the face of the Bill. Councils and other local authorities are democratically elected bodies and their power to make exceptions should not be dependent on regulations made by the Treasury.

(e) the Bill or regulations made under it need to give clarity about the order in which different types of exit payment are to be reduced to stay within the £95,000 threshold;

(f) the Bill or regulations made under it need to include appropriate transitional provision to cater for circumstances where a legitimate decision to approve a departure may have been made before the limit in the new section 153A comes into effect but the exit will not take effect until after the limit comes into effect.

10. Given that the precise impact of the Government’s proposals will depend on regulations, it is essential that the Government gives an unequivocal commitment to public consultation over a significant period on a full draft of the regulations. This is so that the Government can test its detailed approach with organisations that will have to operate the regime and obtain the views of staff and their representative unions on what is proposed, before Parliament is asked to approve any regulations.

11. The lettered points in paragraph 9 above are developed in greater detail below.

Exclusion of pension strain payments

12. ALACE believes strongly that pension strain payments should be excluded altogether from the scope of the limit on exit payments. This could be achieved simply by omitting subsection (5)(c) of the new section 153A of the Small Business, Enterprise and Employment Act 2015.

13. The decision to make an employee compulsorily redundant is the decision of an employer. So, as a matter of principle and in the interests of fairness, the employer rather than the employee should surely bear the costs. That should include the costs of pension strain for employees who are legally entitled by virtue of their age to draw their pension early.

14. What is more, the inclusion of pension strain as an exit payment for the purposes of the cap would bring into play another source of unfairness, as its actual scale in a particular case is materially affected by the historical performance of an individual pension fund (its investment decisions and management thereof). Two individuals who have the same length of service, the same salary, and are made compulsorily redundant on the same day could be penalised by very different amounts of pension strain, depending solely on the historical performance of their respective pension funds. And it should be noted that local government employees have no choice over which fund within the Local Government Pension Scheme they belong to.

15. Calculations done by local government employer groups and by employee representatives show that many loyal longer serving employees (earning sums

as modest as £30,000 per year) will be caught by these proposals. This analysis was confirmed by the Government Minister, Baroness Neville-Rolfe: "where generous early retirement provisions are offered that include immediate payment of unreduced pensions, some lower-paid staff with very long service can currently be eligible for exit packages above the level of the cap" (House of Lords, 4 November 2015, GC365).

1 6 . Ministerial responses in the House of Lords referred often to "payments", which most people are likely to understand as meaning payments received by the individual employee. Likewise "payoffs" was not defined in the Conservative manifesto, thus leaving doubt about how those who read it would have understood the term and what it comprised.

1 7 . It is not clear that the Government has an electoral mandate to include the cost of reducing or eliminating an actuarial reduction within the limit. It confuses payments made to a pension fund by the employer with the cash payments received by the individual employee at the point of exit.

18. Under the Local Government Pension Scheme (LGPS), the current pension regulations mean that certain employees are automatically entitled to early retirement without any reduction in pension. It is a statutory duty under the local government scheme that, in cases of redundancy over the age of 55, the employee is entitled to an unreduced pension at that point and the employer must make good any such actuarial reduction. This is not a matter over which the employer or employee has any choice. It has been a very long-standing feature of the local government pension scheme. Indeed, it was retained as part of the agreement reached between the Government, local government employers and unions on reforms to the pension scheme only in 2013, and appears in regulation 30(7) of the Local Government Pension Scheme Regulations 2013. These arrangements were judged by the Government only just over two years ago as being fair and affordable to the public purse. The economic situation of the country has not deteriorated since 2013 in a way that would warrant breaking the agreement reached in 2013.

19. Yet Schedule 4 to the Bill is clear that the pension scheme regulations will be amended to allow for the cap. We echo UNISON’s concern that this makes a nonsense of the 25 year "guarantee" of no more meddling with public sector pension scheme benefits following the reforms put in place during the last Parliament.

20. Moreover, Schedule 4 suggests that where a "pension strain" payment would breach the cap the consequence will mean that either the actual pension in payment will be reduced or the former employee will have to find a lump sum to buy out that reduction. ALACE does not believe either of those options is acceptable. The former means less income in retirement and, in the latter case, employees will have to pay upfront costs to their pension scheme for losing their jobs.

Amendment of Clause 35 to take fair account of such payments in calculating whether the limit on an exit payment has been reached

21. The following is ALACE’s alternative position. If exclusion of pension strain payments is not possible, the Government needs to explain why not and how it considers its approach to be fair and proportionate.

22.ALACE believes that the Bill should be amended to draw out the important distinction, that the cost faced by the employer in reducing or eliminating an actuarial reduction is not a cash payment given to the employee at the point of exit. It is thus different from all the other items listed in subsection (5) of the new section 153A.

23. ALACE accepts that not applying an actuarial reduction has a financial benefit to the former employee which he or she will enjoy over the period during which the pension is paid. If the Government maintains that this should count towards the cap, then ALACE believes it is essential to find a fair way in which to take account of the cash value of the actuarial reduction that has been avoided.

24. When calculating the value of an individual’s pension pot for the purposes of the Lifetime Allowance under taxation law, a multiplier of 20 is applied to the annual pension that is received.

25. ALACE would call for amendment of the Bill to require that a divisor of at least 20 is used in calculating the financial benefit of a reduced or eliminated actuarial reduction. This would then be the amount that scores against the limit set out in subsection (1) of the new section 153A.

Hypothetical worked example

An individual is made redundant at the age of 56 and earns £35k a year. Under the council’s policy on redundancy payments, the individual is entitled to 12 months’ pay as a redundancy payment. In addition, the cost to the employer of the mandatory pension which has to be paid on an unreduced basis (the pension strain) is £70k.

Under the Government’s approach, the cost of exit payments is £70k+£35k = £105k and therefore exceeds the cap.

The Government’s proposals would require either the redundancy payment or pension to be reduced (it is not clear which) and the individual would be worse off.

Under ALACE’s approach, the cost of exit payments is (£70k/20) + £35k = £38.5k and therefore the cap is not reached.

The individual would not experience any change from what he or she would receive today.

26. The amendment proposed by ALACE would have the effect that at least some of the long-serving, lower paid staff who might be caught by the £95,000 limit would be less likely to be affected. It therefore better delivers the manifesto commitment for which the Government has an electoral mandate.

Inclusion of a mandatory mechanism for index linking the limit

27. The limit in the new Section 153A(1) can be changed by regulations subject to the affirmative resolution procedure. ALACE believes that the value of the limit needs to be inflated automatically by an appropriate index of pay and prices. Otherwise there is a risk of inaction by present or future Governments that could seriously erode the value of the limit in real terms and thus make its impact more severe and relevant to ever-growing numbers of lower-paid staff. Salaries in the public sector are growing modestly, albeit at a slower rate than wages in the whole economy. Thus the value of redundancy payments and of pensions will increase over time, and therefore the value of exit payments as defined will increase.

Ability of a full council meeting of a local authority or meeting of other local authority to waive the limit in any individual case

28. ALACE believes this should be written onto the face of the Bill. Local authorities are democratically elected bodies and their power to make exceptions should not be dependent on regulations made by the Treasury. We recognise the Government’s commitments given in the House of Lords but these would not bind successor Governments.

29. Therefore we feel the appropriate step – recognising local government’s unique democratic accountability among all of the non-central government parts of the public sector – is for provision to be made on the face of the Bill.

30. Local government already has some of the most transparent and onerous

arrangements of any part of the public sector. Transparency, disclosure and positive decision making already exists in respect of:-

- the publishing of policies on severance for chief officers

- the publishing of policies on discretionary compensation for relevant staff

in the event of redundancy

- an authority’s Full Council voting on all severance payments in

excess of £100,000

- disclosure of details of severance payments to senior employees in their

annual statement of accounts.

No clarity about the order in which different types of exit payment are taken into account

31. The Government has failed to clarify the order in which different types of exit payment are taken into account when deciding which payment(s) are to be reduced to stay within the £95,000 threshold. This has to be set out on the face of the Bill or in regulations under it. The Government should be pressed to consult about its intentions so that expert commentators, including organisations that will have to operate the cap, employment lawyers and unions can comment before Parliament is invited to approve the legislation.

Need for appropriate transitional provision

32. Before the regulations made under the new section 153A are approved by Parliament and come into force, organisations will be legitimately taking decisions to approve exits as a result of restructuring, down-sizing in the face of Government spending reductions etc. It is entirely possible that some decisions will be taken before the regime created as a result of clause 35 comes into effect but in relation to an exit on a date after the regime comes into effect. This is because notice periods are typically a minimum of 3 months for senior posts and sometimes can be longer.

33. ALACE is therefore calling for transitional provision on the face of the Bill or in the regulations to cater for circumstances where a legitimate decision to approve a departure may have been made before the limit in the new section 153A comes into effect but the exit does not take effect until after the limit comes into effect. Any employee who has already been made redundant but has not yet left service (often at the employer’s request) will be outside any proposals. The transitional provision would exempt any individual in such circumstances from the effect of the cap.

34. This approach was very sensibly taken when new independent person provisions were introduced recently for processes relating to dismissal of certain officers. All "live" cases at the point of the change were considered under the previous regime, as a result of regulation 3 of the Local Authorities (Standing Orders) (England) (Amendment) Regulations 2015 No 881. The new regime applied only to new cases. What is more, exactly such transitional provision is explicitly given favourable mention in paragraph 4.19 of the Treasury’s current consultation on further limiting public sector exit payments, so should not cause the Government any concerns.

Discriminatory nature of the Government’s proposals

35. Under these proposals, an individual staff member’s length of service and age could become determining factors in employers seeking to avoid the complication of the arbitrary cap. This may be discriminatory. Indeed we are concerned that these proposals will more generally be directly discriminatory on grounds of age, as the entitlement to payments tend to increase with age and service and thus the impact of the cap may be more severe for those who are older. Indeed, the disproportionate impact of an exit cap on older people is explicitly acknowledged in the Treasury’s current consultation on further limiting public sector exit payments.

February 2016

 

Prepared 18th February 2016