Waverley Borough Council Committee System - Committee Document
Meeting of the Executive held on 27/03/2007
Local Government Pension Scheme - Early Retirement, Compensation and Severance Policy
Waverley Borough Council
Executive - 27TH March 2007
LOCAL GOVERNMENT PENSION SCHEME – EARLY RETIREMENT, COMPENSATION AND SEVERANCE POLICY
[Wards Affected: All]
Note pursuant to Section 100B(5) of the Local Government Act 1972
An annexe to this report contains exempt information by virtue of which the public is likely to be excluded during the item to which the report relates, as specified in Paragraph 1 of the revised Part I of Schedule 12A to the Local Government Act 1972, namely:-
Information relating to any individual.
Summary and purpose:
This report advises the Executive of changes to the powers to award discretionary payments on early termination of employment as a result of the Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2006 (SI 2914) that require the Council to update its policy statement on how the Council would compensate staff whose employment is terminated early on grounds of redundancy and efficiency. This report proposes an interim policy statement on how the Council will apply the provisions of these new Regulations from 1st April 2007, to replace the Council’s existing policy statement.
The (Exempt) Annexe to this report seeks the approval to the application of this policy in two cases.
There are no direct environmental implications as a consequence of the proposals in this report.
Social / community implications:
The Council will need to be concerned that the application of the proposed policy, in all cases, would represent, to the local community and auditors, local and accountable value for money.
In connection with the Council’s equality and diversity policies and principles, the Council would also need to ensure that the application of the proposed policy would not, regardless that the impact may be unintentional, have the effect of unfairly disadvantage certain categories of the Council’s workforce, in particular on gender or age grounds.
There are no immediate e-Government implications arising from this report.
Resource and legal implications:
There are no immediate resource implications related to the substantial part of the report although Members are reminded that, on a case-by-case basis, the application of the (previous) Discretionary Payments Regulations has enabled small scale staff restructurings and efficiency savings broadly on a ‘cost justified’ basis. Concerning the second part of the report, the financial details are set out in the (Exempt) Annexe.
The proposed changes are driven by a change in the relevant Regulations which place a requirement on local authorities to review and update their policy statements on applying the compensation Regulations on early termination of employment for redundancy or efficiency reasons.
Officers have been in consultation with other local authorities in Surrey to share information on proposed policy statements, with a view to maintaining a measure of consistency. In that, the proposals contained in this report are most closely aligned to the Surrey County Council policy.
1. Since 1976, local authorities have had powers available to them to make discretionary payments to employees whose employment has been terminated early either on grounds of redundancy or in the interest of the efficient exercise of the employing Council’s functions.
2. These Regulations do not apply to employees whose employment is terminated early on health grounds for which there are separate, non-discretionary, provisions. Further, the Government has now published draft Regulations on a ‘new look’ Local Government Pension Scheme (the [Draft] Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 the provisions of which, when agreed, are is due to come into effect from 1st April 2008. As written, these Regulations may have implications for the Council’s early retirement, compensation and severance policy.
3. Up to this recent change, the discretionary powers were consolidated into the Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2000 – known of as the DCR.
4. In summary, the key powers available have been to:-
Remove the statutory weekly pay ceiling, under the Employment Rights Act 1996, for calculating redundancy payments (currently £290 a week);
Award added years of pensionable service on top of the employee’s actual pensionable service, in the case of those whose services are terminated on redundancy or efficiency grounds and who are between the ages of 50 years and 65 years (and whose earned pensionable service is less than 40 years).
Award a one-off lump sum of up to 66 weeks’ pay (inclusive of the statutory redundancy provision) based on a service and age-related formula for employees below the age of 50 years and/or not a member of the Local Government Pension Scheme (LGPS).
5. The Council has had a policy statement in respect of its application of these policies. In summary, these provided for: -
a. In cases of redundancy:-
compensation up to the maximum permissible (up to 66 weeks’ pay inclusive of not in addition to the statutory redundancy provisions);
compensation to be paid on actual weekly earnings;
for staff aged over 50 years, immediate access to pension benefits plus compensatory added years (of pensionable service), normally up to 6 2/3rd years (subject to age and length of service) but potentially up to 10 years (subject to age and length of service) but any period in excess of 6 2/3rd would result in a reduction in the redundancy (effectively it would give the employee greater pension and a lower lump sum).
b. In cases of efficiency:-
As above but, for staff aged over the age of 50 years who had immediate access to pension benefits, a more flexible arrangement based upon each case on its merits with, in particular, compensatory added years being wholly discretionary.
The Council’s policy on discretionary payments on early termination of employment has the effect of being a condition of service for staff.
The New Regulations
6. The Government believed it to be necessary to revoke the DCR 2000 in order to comply with the age-related provisions of the European Employment Directive which have been implemented in the UK through the Employment Equality (Age) Regulations 2006 which came into force on 1st October 2006.
7. Those DCR provisions have age and length of service considerations that the Government has concluded would be discriminatory in a way that could not be objectively justified.
8. In summary these new Regulations: -
Retain the discretionary power to waive the statutory weekly pay ceiling when calculating redundancy payments;
Remove the powers to award added years of pensionable service on early retirement (see below in relation to augmenting pensionable service); and
Provide a new discretionary power to make a one-off lump sum payment of up to, but not exceeding, two years’ pay (104 weeks). This would be inclusive of, not in addition to, the statutory redundancy payment.
9. The amount of the payment would not be based upon a pre-determined age or on a service-related formula. Instead the employing authority would have the discretion to decide, within 6 months of the employee’s date of termination, to make a lump sum payment of up to a maximum of 104 weeks’ pay.
Augmentation of Pensionable Service
10. From paragraph 8 above, local authorities will continue to have, by virtue of Regulation 52 of the Local Government Pension Scheme Regulations 1997, the discretionary power to augment an employee’s local government pension through the award, at any time during active membership of the LGPS, of an additional period of membership. This represents a cost to the employing authority. However, unlike the (former) DCR which limited the scope to award added years to those over the age of 50 years and only on early retirement, this discretionary power can be applied to a member of staff of any age and at any time, whilst in employment with the local authority, thereby avoiding the potential of age discrimination.
Effective Date of the New Regulations
11. The Regulations came into force on 29th November 2006 and have retrospective effective from 1st October 2006.
12. However, the Regulations also contain transition provisions to the end of 2006/07 financial year. These mean that the employer can choose either to use the DCR (the 2000 Regulations) of the new 2006 Regulations for a person whose employment with them commenced before 1st October 2006 and whose termination date is on or after 1st October 2006 and before 1st April 2007.
13. After 31st March 2007, the DCR (2000) will longer apply and Waverley now needs to adopt a policy under the new Regulations.
14. In the event that any early terminations by Waverley on grounds of redundancy or efficiency, the application of either of the compensation Regulations would be so as not to disadvantage the employee.
The Context for the Adoption of Policy Statement on the Discretionary Payments on Early Termination on Grounds of Redundancy or Efficiency
15. The new Regulations provide that, when formulating this policy, a local government employer must: -
Have regard to the extent to which the exercise of their discretionary powers in accordance with the policy, unless properly limited, could lead to a serious loss of confidence in the public service; and
Be satisfied that the policy is workable, affordable and reasonable having regard to foreseeable cost.
16. Also, it is critical, given the basis under which these Regulations have been introduced, to adopt a policy that would not be subject to challenge on the grounds of age discrimination. However, it is noted that the Government has deemed that, with the removal of lower and upper age limits in terms of entitlements to statutory redundancy payments, the existing formula for statutory redundancy payments of age and service would be permitted under the EU Directive on Age, i.e. as set out in Regulation 33 of the Age Discrimination Regulations.
17. Specifically, the statutory entitlement to a redundancy payment, although the lower and upper age limits are now removed, would still be calculated as: -
0.5 week’s pay for each year of service under the age of 22 years; rising to: -
1 week’s pay for each year of service between age 22 and 41 years; rising to: -
1.5 weeks’ pay for each year of service over age 41 years.
18. The calculation is limited to a maximum of 20 years service, i.e. the maximum statutory redundancy payment is 30 weeks’ pay (20 years service x 1.5 weeks’ pay).
19. Finally, it is relevant to recognise that the existing policy, of which only limited use has been made in Waverley since 1999, has been necessary and very effective in: -
supporting organisational change;
achieving change in a cost neutral way; and
maintaining good employee relations.
20. In changing the policy to reflect the new Regulations, so far as is reasonably possible, the new policy should ensure that the above outcomes are maintained. To that end, in formulating the policy, the views of Staff Representatives should be taken into account. The potential for new LGPS Regulations being agreed some time in 2007 that may impact on the Council’s early retirement and severance arrangements creates uncertainty, in both parties, on the best way forward.
21. One particular issue that has existed under the DRC 2000 where age has been a material consideration, is the ‘cliff’ that appears between severance at age 49 years and below, and those at 50+ (soon to rise to 55+). The severance payment has been calculated in the same way in both cases but the employee at age 50+ has also had immediate access to pension benefits. In seeking to avoid age discrimination in applying this policy, the opportunity should be taken to smooth out this significant difference.
The Proposed Policy for Waverley
22. Up to now, the DCR have made no distinction between cases of redundancy and cases of efficiency although the application of the DCR in Waverley, based on limited experience, has been to exercise the maximum discretion in cases of redundancy but to deal with efficiency cases on an ‘each case on its merits’ basis. It is felt that, under the new Regulations, there should be a clear distinction between redundancy cases and efficiency cases.
23. The following proposals are put forward;
. It has been a long-standing practice in local government to calculate redundancy pay on the actual week’s pay of the employee and this was affirmed in the Council’s current policy on applying the DCR provisions. Consistent with the approaches being taken by other local authorities, it is recommended that this be continued.
Additional Compensation Payments
. The option to award added years under the DCR has been removed and has been replaced by a discretionary power to grant up to 104 weeks’ pay. The options available to the Council are considered to be: -
a. Consider each case on its merits and make a decision based upon the reasons for making the payment and the savings (both in terms of financial cost and employee relations considerations), and award up to the prescribed maximum of 104 weeks’ pay. This would allow the Council maximum flexibility in determining the compensation levels but runs the clear risk of being perceived to be inconsistent, unfair and potentially discriminatory. To meet the test of objective consideration, the reasons would have to be transparent and recorded. The payment might, for example, be part of a formal ‘compromise agreement’ made at the determination of an employee’s contract.
b. Decide upon a maximum amount of compensation that would be paid, up to a maximum of 104 weeks’ pay, and pay that in all cases. This would meet the concerns about age discrimination but would not be seen to be fair as it would result in disproportionate amount of compensation being paid to an employee with a short period of service when compared with an employee with a long period of discontinuous service. (the Council could also considered a fixed sum over and above the statutory redundancy payment but that may also be perceived to be unfair for staff at different salary levels)
c. Decide upon a maximum amount of compensation and pay that in addition to the statutory provision but ensuring that the total compensation did not exceed 104 weeks’ pay, e.g. say 52 weeks’ pay. That would introduce an element of age and service related compensation through applying the statutory provision but topping that up with a consistent to all discretionary compensation payment.
d. Given that the formula for statutory payments payment as described in paragraph 17 above continues to be age and service related, the Council could link compensation payments to the statutory redundancy pay calculator but apply a multiplier, i.e. multiplying the number of weeks’ pay the employee would be entitled to under the statutory formula by an agreed factor. This could be up to 3.465 which, when applied to the maximum statutory redundancy period (30 weeks’ pay) would result in a maximum compensation payment period of (approximately) 104 weeks. In all cases, this would be inclusive of the statutory redundancy payment.
This, on the face of it, would appear to be the option that is least vulnerable to challenge and could be seen to be the most fair way to proceed. However, it is uncertain whether the Government’s view of the existing statutory redundancy provisions would be sustainable under challenge on age discrimination grounds.
However, if such a formula were adopted, it would require the Council to apply it in all cases of redundancy…....unless and until the Council changed its policy. The Audit Commission has previously expressed the view that each case would be treated on its merits and it is not clear how this would be viewed by the Audit Commission. It would, though, be a desirable approach in the interests of fairness and transparency and would avoid the need to provide an objective justification in each case
e. Decide upon a period of compensation that would be paid for each completed year of service at the time of severance. This has the clear advantage of having the payment related to length of service, notwithstanding that it is more likely, but not necessarily so, that the older employee has the greater length of service. A reasonable period in the context of the previous DCR 2000 would be 3 weeks’ pay for each completed year of service.
24. Although the Council could continue not to make a formal distinction between redundancy and efficiency cases in respect of compensation, the legal protection that the Government says that Regulation 33 of the Age Discrimination Regulations affords to cases of redundancy will not apply to efficiency cases. The linking of compensation cases in efficiency cases to age and service would need to be objectively justified. This may prove problematic, and it is therefore considered that to reduce legal challenge, and to give the Council the flexibility to deal with individual cases, each case of termination on grounds of efficiency should be treated on its merits. (This accords with the Audit Commission’s overall approach to compensation payments generally.)
25. It is therefore felt that in efficiency cases consideration should be given to making a one-off payment, based on the merits of each individual case. This, if paid at all, should not exceed what would be paid in redundancy cases, i.e. subject to a normal upper limit of 66 weeks’ pay. However, it is felt that, for exceptional cases, the potential to pay up to the maximum permitted under the new regulations (i.e. 104 weeks’ pay calculated on a sum up to the employee’s actual week’s pay) should be retained. Factors to be taken into account in awarding compensation would include: -
Overall reasonableness, including benefits to the Council tax-payer by the employee leaving the Council’s service.
Direct financial savings to be incurred as a result of the employee leaving the Council’s service.
Employee relations considerations
The perceived consequential efficiencies in service delivery of the proposed termination
The likelihood that the employee will find alternative employment at a similar level.
Whether the employee is of an age that would enable immediate access to retirement benefits.
26. Employees who are members of the Local Government Pension Scheme would be given the option of converting compensation payments into additional pensionable service on a strictly cost-neutral basis, in accordance with the formula published by the Government.
Augmentation of Pensionable Service
27. Under Section 52 of 1997 Regulations, the total amount of augmented service that can be given cannot exceed the shorter of: -
6 2/3rd weeks; or
the period by which the member’s potential total membership falls short of their total membership had they continued to work until 65 years of age.
28. The decision to augment can only be taken when the employer is an active member of the LGPS.
29. A statutory (non-enhanced) redundancy payment, but including the calculation of the payment based on actual weekly pay, can be paid in addition to the award of augmented service but enhanced payments cannot. Employing authorities that augment service have to pay the cost of so doing.
30. Waverley has, hitherto, decided against making use of the power to augment service and it is proposed to continue that approach on the grounds that it would be difficult to apply a consistent objectivity test and difficult to avoid an age discrimination challenge
31. The Council needs to introduce a revised early retirement/severance policy by April 2007 without which it cannot take action in such cases. The draft ‘new look’ Local Government Pension Scheme Regulations may impact upon the application of the early retirement/severance policy.
32. Interim arrangements should be adopted pending adoption of the ‘new ‘look’ pension scheme. The revised policy should not be materially different from the existing policy to avoid a negative impact on the employee relations climate. The Council’s interim policy should, as far as it reasonably can, be free from challenge under age discrimination legislation. As such, the focus should be on service-related rather than age-related severance payments.
33. The agreed interim policy should be subject to consultation with Staff Side in the context of the revised Local Government Pension Scheme when adopted. The criteria of acceptability and affordability need to be met. With the above issues in mind, your officers consider that the option at paragraph 23 e. above would best meet the Council’s needs whilst maintaining the essence of the existing policy.
34. Specifically, your officer shave concluded that: -
In redundancy cases
Redundancy payments should continue to be calculated on the actual weekly pay;
The payment should normally be 3 weeks’ pay for each completed year of service;
The period of redundancy pay should be capped at 66 weeks’ pay to maintain the existing maximum level of compensation;
In cases where the employee has immediate access to pension benefits, the capitalised cost of the employer’s decision to trigger in early payment, the amount of compensation paid should be reduced by the amount of the capitalised cost subject to the payment being calculated on not less than the statutory redundancy payment period (at maximum, 30 weeks);
To recognise the removal of the ability to grant compensatory added years to staff at age 50+ (or 55+ when the Regulations change), in exceptional cases, an additional lump sum may be paid subject to the total lump sum compensation not exceeding 104 weeks’ pay as provided for in the new DPR.
criteria to help identify what constitutes an exceptional case should be determined, after consultation with Staff Representatives, and put forward for agreement when the final version of Waverley's compensation arrangements are submitted for adoption.
In efficiency cases
Each case should be determined on its merits;
compensation paid should not exceed the compensation that would have been paid in a case of redundancy.
It is recommended that: -
1. to meet the requirements of the Local Government (Early Termination) (Discretionary Compensation) (England and Wales) Regulations 2006 (SI 2914), the Executive should adopt the revised policy on compensation payments on early termination of employment, as set out in paragraph 34 above, as an interim policy;
2. the interim policy be reviewed in consultation with Staff Representatives when the proposed ‘new look’ pension scheme arrangements (as currently set out in the draft Local Government Pension Scheme [Benefits, Membership and Contributions] Regulations 2007) are adopted; and
3. the early retirement proposals as set out in the (Exempt) Annexe be approved.
There are no background papers (as defined by Section 100D(5) of the Local Government Act 1972) relating to this report.