UK: Reform Of The Civil Service Pension Scheme

Last Updated: 19 October 2016
Article by Pete Miles

On 8 February 2016, the Cabinet Office published a consultation on proposals to reform the Civil Service Compensation Scheme (the "CSCS").

The first phase of the consultation process has now completed and the Cabinet Office has published its response to it.

The Cabinet Office is intending to press ahead with reforms that, among other things, will change the way that compensation is calculated under the CSCS.

What is the CSCS?

The CSCS provides the statutory framework for the provision of compensation to civil service employees who are redundant or who accept "voluntary exit" terms.

Under the terms of the unreformed CSCS, employees are entitled to receive a lump sum compensation payment and the amount of that payment will depend upon the circumstances in which the employee has exited the civil service.

The three exit categories covered by the CSCS are (i) Voluntary Exit (ii) Voluntary Redundancy and (iii) Compulsory Redundancy (each an "Exit Category").

Ordinarily, the amount of the compensation payment is one month's salary for every year of service (the "Multiplier") up to a maximum number of months (the "Cap") which varies depending on the Exit Category that applies.

In addition, where an employee:

  1. has two years' service in the Principal Civil Service Pension Scheme (the "PCSPS"); and
  2. has reached his minimum pension age in the PCSPS (50 or 55 depending on when the employee joined the PCSPS) but has not reached his Normal Retirement Age,

he may retire early and use his compensation payment to "buy out" the actuarial reduction that would ordinarily have been applied to the amount of his pension (to reflect the fact that it will be paid for longer).

In order to encourage employees to accept Voluntary Redundancy terms, this "buy out" of the actuarial reduction is employer-subsidised in circumstances where an employee has accepted Voluntary Redundancy and the employee's compensation payment is insufficient to meet the cost of the buy-out.

Rationale for proposal to reform the CSCS

The Cabinet Office has identified a number of principles that are driving the reform proposals. In particular, reform is being pursued with a view to:

  1. aligning the CSCS with other compensation reforms proposed across the public sector;
  2. supporting employers in reshaping and restructuring their workforce;
  3. increasing the attractiveness of early staff exits;
  4. saving a third on exit costs; and
  5. ensuring that early access to pension remains appropriate in the context of employees remaining economically active for longer.

Reform options

The consultation asked respondents to consider and comment on a variety of proposals to reform the CSCS.

In relation to compensation payments, the key question was whether the Multipliers and the Caps used to calculate compensation payments should be reduced.

On pensions, the Cabinet Office asked whether it should amend the CSCS so as to:

  1. remove employer-subsidised early retirement completely; or
  2. increase the age at which an employee may elect to receive an employer-subsidised early pension to the minimum pension age in the PCSPS applying to members who join the scheme at that time; or
  3. restrict the entitlement to employer-subsidised early retirement to employees who are within five years of state pension age.

Response to the consultation

The majority of respondents were opposed to the reform proposals.

In relation to the pensions aspects of the proposal, respondents acknowledged that while many ex-civil servants remain economically active into their 50s, it could be more difficult for over 50s to get another job if they are made redundant.

Accordingly, the majority of respondents felt that the current pension aspects of the CSCS remain appropriate and fit for purpose.

Key reform proposals

Notwithstanding that the majority of respondents opposed the reform proposals, the Cabinet Office intends to press ahead with reforms on the basis that savings have to be made to make the CSCS more affordable.

That said, the Cabinet Office wishes to proceed on the basis of a package of reforms that has the support of the majority of the trade unions representing staff covered by the CSCS.

Accordingly, the Cabinet Office has made a formal offer to the trade unions for them to consider.

In summary, under the terms of the offer, compensation payments will be reduced in respect of each Exit Category by:

  1. changing the Multiplier from one month's to three weeks' salary for every year of service; and
  2. reducing the Cap by three months in respect of each category.

In relation to pensions, the terms of the offer are as follows:

  1. employer funded un-reduced pensions will only be available from age 55 or 10 years behind the employee's state pension age, whichever is later;
  2. employees who are above minimum pension age may partially buy out the actuarial reduction where the value of the redundancy payment is insufficient to buy it out fully; and
  3. employees who are above minimum pension age may partially buy out the actuarial reduction where the full redundancy payment is subject to legislative restrictions (e.g. the introduction of a cap on exit payments).

If this offer is not accepted by a sufficient number of trade unions (as determined by the Minister), the Cabinet Office intends to implement reforms on a less generous basis by:

  1. reducing the Caps applying to Voluntary Exit and Voluntary Redundancy by an additional three months; and
  2. omitting options (ii) and (iii) above from the pensions proposal.

Other aspects of the reform proposals

The Cabinet Office has also announced an intention to:

  1. increase the amount of the "lower paid underpin" that applies when calculating compensation payments;
  2. align notice periods as between the three exit categories so that three months' notice is required in each case (it is currently six months in respect of Compulsory Redundancy); and
  3. implement a revised Protocol for Civil Service Redundancies to speed up the exit process.

Action

The Cabinet Office has said that it will take a final decision on the reforms to be implemented once it has received the considered response of all of the trade unions.

We will provide a further update once a final decision has been made.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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