Civil Service Compensation Scheme - changes introduced on 1 April 2010

15.04.10

 

The Civil Service Compensation Scheme (CSCS)

The CSCS is a statutory scheme that provides compensation to certain civil servants who leave office through compulsory or voluntary redundancy.

The previous terms of the CSCS were implemented in 1987. The terms were perceived as being outdated and insufficiently flexible to meet the needs of a modern Civil Service.

The Government's key principles for reform were:

  • to achieve significant cost savings
  • to ensure that the CSCS is not "overly-generous"
  • to remove the "perverse incentives" of the previous arrangement
  • to comply with the age discrimination legislation.

The changes to the CSCS took effect on 1 April 2010[1].

The Principal Civil Service Pension Scheme will be unaffected as a result of the CSCS reforms.

Summary of the previous CSCS

Broadly speaking, the previous CSCS awarded compensation to staff with more than one year's service on the following basis:

  • severance payments for those under 50
  • enhanced early retirement terms for those over 50.

Under 50 (or over 50 with less than five years' service)

Members were entitled to a severance payment calculated on the following basis:

  • one month's final pensionable pay for each year of service; plus
  • one month's final pensionable pay for each year of service after the later of:
    • age 30; and
    • five years service; plus
  • one month's final pensionable pay for each year of service after the age of 35.

Any such severance payment was capped at a maximum of three years pay.

Over 50 (with five years' service or more)

Members aged 50 or over with five years service or more who were made redundant were entitled to the compensation calculated on the following basis:

  • Pension: an immediate unreduced pension and lump sum under the terms of the Principal Civil Service Pension Scheme;
  • Pensionable Service: The pensionable service of such members could be increased by up to six and 2/3 years; and 
  • Lump Sum: A lump sum payment equivalent to six month's final pensionable pay, or statutory redundancy if higher.

The new CSCS

Compulsory Redundancy

The qualifying period has been increased so that a minimum of two years' service is required in order to qualify for compulsory redundancy benefits.

From 1 April 2010, when making compulsory redundancies all departments must adhere to the terms of the new CSCS. In summary:

  • the changes introduced on 1 April will see a reduction in the level of benefits paid to civil servants on redundancy
  • benefit awards will be based on a formula relying on length of service and salary rather than age.

Compensation due to civil servants on compulsory redundancy will now normally be provided as a cash payment; compensation payments will be made from the CSCS regardless of age. Under the new CSCS, the compensation lump sum payable to staff made compulsorily redundant will be calculated in the following manner (pay will normally be determined as the average of the individual's actual pensionable earnings over the last two years of service):

  • one month's pay for each year of service for the first five years of service; plus
  • two month's pay for each subsequent year of service.

Any compensation will be subject to a maximum of:

  • three years' pay where this results in a payment of no more than £60,000; or
  • the higher of two years' pay and £60,000 in other cases[2].

This change to the original proposals should provide better outcomes for those on annual salaries of less than £30,000.

Civil servants leaving on compulsory redundancy terms from age 55 can also choose to take a pension and use their compensation payment (in whole or part) to "make good" any actuarial reduction to their pension.

Voluntary Redundancy

It is worth noting that where a departmental employer is engaging in a voluntary redundancy programme it has a greater degree of flexibility in respect of the compensation payments it wishes to award.

Government departments will set their own qualifying service period for entitlement to compensation (which cannot be more than 24 months).

Any compensation package on voluntary redundancy:

  • must take account of affordability;
  • may be more or less generous than the "standard" compulsory redundancy package; and 
  • must be subject to an absolute maximum cap of two years pay.

The "compensation package" could, for example, consist of an early retirement offer to those employees aged over 55 instead of a compensatory lump sum. In offering such a package, departmental employers are not able to grant notional additional years of service to increase benefits, but can waive the early retirement reduction in some cases so that an employee gets an unreduced pension.

Transitional arrangements

Those staff whose current period of service with the Civil Service began before 30 July 2007 and who are made redundant with a last day of service before 1 April 2011 may opt for any compensation payment payable to them to be calculated in accordance with the terms of the old CSCS.

Comment

The reforms are overdue. They give departmental employers greater flexibility as to the compensation payable on voluntary redundancy and will enable a greater proportion of the lowest paid staff to receive an appropriate level of compensation.

The calculation of benefits by reference to pay and service could be argued to potentially indirectly discriminate on grounds of age or sex. However, the response to the consultation revealed that respondents supported a greater link between service and the compensation payable.

Five of the six main Civil Service unions recognised the requirements for reform and believed that the terms reached were the best that might reasonably be negotiated. The Public and Commercial Services Union oppose the changes and are seeking a judicial review of them. This will be heard on 22 and 23 April. Prospect (the union representing professional engineers) described the changes as being close to what the unions would expect through a successful judicial review. Certainly, the changes are similar to those made in other public sector schemes.

Common to the reformed CSCS and the schemes for teachers, NHS employees and local government employees is that the compensatory lump sum that can be paid is limited to the equivalent of two years pay (save that in the case of compulsory redundancy under the CSCS, the lump sum could be up to three years pay). Differences exist in the early retirement terms offered by the members of other public sector schemes.

Local government and NHS employees made redundant over the minimum pension age retain the right to an immediate unreduced pension and may receive (at least part of) a lump sum payment on top. However, civil servants over 55 but under 60 made compulsorily redundant can only draw an unreduced pension if they can pay for it out of their compensation payment. In the case of voluntary redundancy, Civil Service employers have the discretion to offer early payment of pension (instead of a lump sum) as is the case under the Teachers Pension Scheme.

Contractors providing services to the Civil Service should take note of these changes. Contractors should understand, and cost for, the redundancy terms offered to Civil Service staff and which they may be required to replicate following any future TUPE transfers of staff from the Civil Service.

Footnotes

[1] Implemented by the Principal Civil Service Pension Scheme (Amendment) Scheme 2010 and the Civil Service Compensation Scheme (Amendment) Scheme 2010, laid before Parliament on 5 February 2010.
[2] For those staff over the Principal Civil Service Pension Scheme's normal pension age (typically 60) and who have access to an unreduced pension, the cash compensation payment will be less and will typically be six months' pay. Payments to those approaching pension age will be tapered.

 

Key Contact

Christopher Nuttall, solicitor, +44 (0)121 685 2835, christopher_nuttall@wragge.com

This analysis may contain information of general interest about current legal issues, but does not give legal advice.