Categories
news newsletter

Newsletter – public sector redundancy pay and pensions

It seems that a serious row is brewing over cutting the cost of public services by reducing numbers of Civil Servants. This post attempts to explain some of the legal background.

Civil servants are not entitled to statutory redundancy pay. Instead they have their own, generally more favourable, arrangements under the Civil Service Compensation Scheme (“CSCS”) set up under the Superannuation Act 1972 . The last government proposed amendments to the CSCS, intending that changes would apply from 1st April 2010. The amendments were to be made with a view to reducing the benefits receivable in some cases by civil servants who are made redundant, are compelled to take early retirement or are dismissed on grounds of structural reorganisation or in similar circumstances.
The benefit levels the government sought to reduce had generally been set at a time when the pay of civil servants was less than that of people of similar status in the private sector. At that time, along with greater job security, the CSCS was seen as a compensating “perk”. Most unions representing civil servants agreed to the proposed 2010 changes, perhaps accepting the argument that the generous benefits offered by the CSCS are no longer appropriate now that civil servants generally have similar pay to those of similar status in the private sector. However the biggest civil service union, the PCS, does not accept that position and did not agree the proposed changes. Mark Serwotka, its general secretrary, is reported to believe that “The civil service is nearly 7% behind comparable jobs in the public sector and even more in the private sector, because the balance used to be [that] we got less pay but some of the other conditions were slightly more generous”.

The PCS union took a strong line and eventually sought judicial review of the amendments proposed by the government. PCS argued in the High Court in May 2010 that the Superannuation Act 1972 ss.1(3) and 2 required the consent of its members before the government’s proposed amendments could be made. No such consent had been obtained. The High Court agreed and handed down a ruling accordingly (Public & Commercial Services Union, R (on the application of) v Minister for the Civil Service [2010] EWHC 1027 High Court (Admin)).

The High Court ruling effectively sent the new coalition government back to the drawing board, leading to headlines such as one in the Daily Mail on 10 May which read “Unions warn of Greek-style riots in Britain against public sector cuts after court victory over capping of redundancies”.

The coalition government then announced, in early July, that it would introduce a Bill to revive the amendments which the High Court had ruled were improperly implemented. The intention is to set a cap of an amount equal to twelve months pay for compulsory redundancy for civil servants and fifteen months for voluntary schemes. This has not gone down well with the PCS Union. Mr Serwotka has warned that any renewed attempt to force through amendments could result in industrial action.

A report in the Sunday Telegraph of 17 July concerning redundancies in the National Health Service, says that around 30,000 administrators are expected to lose their jobs as 152 primary care trusts and 10 strategic health authorities are abolished in the reorganisation and that “NHS organisations have been ordered to divert £1.7 billion from the front line into a fund to pay for the redundancy deals”. It suggests that redundancy payments to chief executives will generally be between £300,000 and £400,000, with a few up to £900,000. Even more recently Cabinet Office minister Francis Maude is reported to have said that some civil servants are so “prohibitively” expensive to make redundant that they are being left “in limbo” without a proper job (the Guardian 27 July 2010).

Against this background the reports of the recently set up official Review of Fair Pay in the Public Sector (Chairman Will Hutton ) and of the Public Services Pensions Commission (Chairman John Hutton) will be of particular interest when they are published.

Separately a report from a similarly named but unconnected and non-official Public Sector Pensions Commission suggests that the government has been using optimistic actuarial valuation methods to calculate the cost of public sector pensions. It finds that public sector employers and employees are “not charged the full current service costs of the liabilities the pension schemes are taking on each year” and goes so far as to suggest that the current arrangement is “like an unstable Ponzi scheme”. The report says that public sector pensions are worth on average at least 40 per cent of salary and warns that contributions may need to rise sharply if benefits remain unchanged. It sets out various options for reform. Suggestions include:
• a reduction of accrual rate to provide a pension of 1/80th of final salary for each year of service, or a switch to career average revalued earnings, would save around £10 billion per annum;
• an increase to a pension age from, generally 60, to 65 for all members would save around £5 billion;
• a 2 percentage point increase in employee contribution rates could raise up to £2 billion a year;
• serious consideration should be given to ending the contracted-out status of public sector pensions;
• a switch to funded defined contribution or notional defined contribution arrangements would reduce the risk to the taxpayer but would involve “considerable transitional issues”;
• hybrid schemes combining a core Defined Benefit with flexible Defined Contribution top-ups, could provide “an important compromise”.

Martin Malone

By Martin Malone

I'm a solicitor and the chief operating officer at Canter Levin & Berg. I was formerly head of the employment department.
I maintain this website so if you have any suggestions, criticisms or recommendations please email me at martinmalone@canter-law.co.uk.
Outside work my interests include national hunt horse racing, France and French wine and current affairs. I also design and maintain websites.