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Q&A about the Civil Service Compensation Scheme

This is the Q&A brief we produced for members in October 2010.

Questions

1. Why is Prospect recommending agreement to proposed changes to the Civil Service Compensation Scheme (CSCS)?

2. Didn't Prospect and four other unions agree to changes to the scheme?

3. Has the position changed under the new coalition Government?

4. What are the new terms in the offer?

5. What about tax?

6. What about part-timers?

7. What is the impact of taking partial retirement?

8. What protection is there for members with pre-87 reserved rights?

9. What about members over normal pension age?

10. Is there any tapering of benefits? 

11. Are the proposed terms not age discriminatory?

12. I understand there has been a recent European judgement on the issue of age discrimination in redundancy schemes, does this affect the CSCS proposals?

13. Will Prospect support age discrimination cases in relation to the CSCS terms being balloted on?

14. Why are the voluntary terms better than compulsory terms?

15. So, what discretion do departments have on the voluntary terms?

16. When do the new terms come in?

17. What happens if members reject this offer?

18. Will the Government re-open negotiations if members of the 5 unions reject the offer?

19. PCS successfully challenged any changes to the Civil Service Compensation Scheme through a Judicial Review in April - how can this now be overturned?

20. Can the Government change this Act without agreement?

21. If we do not pursue a legal challenge, will PCS challenge the detail of this offer?

22. Surely delay would suit us because the current terms would prevail?

23. What is the position of the 5 unions involved?

24. Is PCS balloting members?

25. Why is Prospect recommending it?

26. What has been the role of PCS in this?

27. What about the detailed amendments to the scheme, when will we see these changes?

28. Why has the notice period for PILON changed from 6 months to 3 months - surely this was contractual?

29. Will members be able to participate in a ballot on the offer?

30. Will the proposed terms apply to members in Nuvos and Partnership?

31. If I qualify for an early pension can I take the lump sum instead?

32. I transferred service into the civil service pension scheme, will this count towards redundancy benefits?

33. Is payment in lieu of notice counted towards service in the pension scheme?

34. Do part years of service count towards redundancy benefits?

35. I am over 50 and in the Classic section of the pension scheme - do I have to use my pension lump sum to pay for the unreduced pension on redundancy?

36. How do I work out the cost of buying out the actuarial reduction on my pension and pension lump sum? 

1. Why is Prospect recommending agreement to proposed changes to the Civil Service Compensation Scheme (CSCS)?

Prospect did not seek to renegotiate the current terms of the Civil Service Compensation Scheme (CSCS). The previous Labour Government embarked on that process, in part, due to successful challenges by Prospect and PCS on grounds of age discrimination. The coalition government has also sought to change the scheme.

2. Didn't Prospect and four other unions agree to changes to the scheme?

In February 2010, five unions reached agreement with the previous Labour government over terms to amend the scheme. This was subsequently challenged by PCS in a successful Judicial Review. However, as we predicted at the time, the apparent victory was short-lived, because the government moved primary legislation to amend the 1972 Superannuation Act, which enables it to go ahead and change the CSCS (see news update on website at http://www.prospect.org.uk/members_areas/sector/CVL/message/411).

3. Has the position changed under the new coalition Government?

Both parties to the coalition government, the Liberal Democrats and the Conservatives, said in their pre-election statements that they would amend the scheme to bring it more closely in line with private sector arrangements. Most private sector arrangements are based on the statutory minimum, which has a maximum payment of £11,400. The coalition government also came to office with an agenda of unprecedented cuts in public expenditure. The current offer needs to be seen in that context.

4. What are the new terms in the offer?

Voluntary

  • Voluntary terms will be capped at 21 months' pay with the potential of up to an additional 3 months' PILON (pay in lieu of notice);
  • Cap of 6 months' pay for those over normal pension age
  • All individuals facing redundancy will be given an opportunity to take or 'bank' an offer of voluntary terms;
  • Accrual for both compulsory and voluntary redundancies will be one month per year of service, but there will be discretion for employers to exercise faster accrual rates in a voluntary scheme, if deemed necessary;
  • For people earning less than £23,000, for the purposes of the redundancy calculation,they will be deemed to earn £23,000.
  • The option to have access to an unreduced pension and pension lump sum for all with 5 years of service who are over minimum pension age (this is 50 for members in service before April 2006 and 55 for members who joined later; minimum pension age is a feature of the pensions taxation system and is not being reviewed by Lord Hutton);
  • If the value of unreduced pension and pension lump sum is less than the standard redundancy terms then members retain the difference as a cash redundancy payment.
  • Pre-1987 Reserved Rights will be dealt with by separate correspondence.

Compulsory

  • Compulsory terms capped at 12 months' pay with the potential of up to 3 months' PILON.
  • Cap of 6 months' pay for those over normal pension age

5. What about tax?

Redundancy payments are currently tax-free up to £30,000. Any redundancy lump sum in excess of that is taxable as income at the members' marginal rate of tax. All PILON is taxable at the members' marginal rate and is liable to National Insurance deductions. However, PILON also attracts an extra element in respect of pension contributions that would have been payable during the notice period. Pensions are taxed as income but pension lump sums are tax-free.

Members may have seen recent press coverage (and an article in Profile) about upcoming changes to pensions tax law. While these changes are likely to mean that enhanced pensions on redundancy will potentially incur a significant tax liability this is not the case for the unreduced pensions payable under the proposed CSCS terms being balloted on.   

6. What about part-timers?

Part-timers receive equivalent benefits to full-time colleagues and civil servants will not be penalised for going part-time shortly before being made redundant.

This is achieved by calculating compensation benefits using full-time equivalent earnings. In the calculation of benefits the amount of service is rated down by the proportion of full-time hours actually worked.

For example: someone working 2.5 days per week on £12,000 per annum (actual earnings) for 10 years would receive benefits based on earnings of £24,000 (full-time equivalent) and service of 5 years (10 years working half-time). In this case the benefit would be £10,000 (£24,000 / 12 X 5). This is the same redundancy benefit as someone working full-time on £24,000 per annum with 5 years' service.

There is a further cap on the benefits of part-time workers to ensure that they are not eligible for much higher awards than full-time colleagues. This cap is: the maximum payable to a full-time worker (based on 21 years' reckonable service and the same full-time equivalent pay) mulitplied by A / B where A is the period of full-time equivalent current reckonable service and B is the period of current reckonable service that would have applied if the member had worked full-time throughout.

An example may explain this more clearly: someone who worked 4 days per week for 40 years on full-time equivalent earnings of £24,000. The usual formula produces a benefit of £42,000 (£24,000 / 12 X 21 (capped number of months)). This is over twice actual annual earnings. The further calculation is the full-time equivalent benefit X A / B (actual reckonable service / reckonable service if always worked full-time). In this case it is £42,000 X 32 / 40 or £33,600. This is 21 months on actual earnings - the same cap that applies on full-time cases.

Someone going part-time shortly before redundancy is protected.

For example: someone who worked full-time for 8 years and went down to 2.5 days per week for two years before being made redundant and was earning £12,000 per annum (actual earnings) at that time. In this case the benefit would be £18,000 (£24,000 / 12 X 9).

7. What is the impact of taking partial retirement?

Partial retirement will not affect redundancy benefits. Full current reckonable service will be used in the calculation.

8. What protection is there for members with pre-87 reserved rights?

This group of members are eligible for the new terms. However on compulsory redundancy there will also be a calculation of their benefits under the pre-87 terms on service to the date of introduction of the new scheme. Depending on the timing of redundancy a factor will be applied to the calculation (60%, 50% or 40% for departures in the 1st, 2nd or subsequent years). If the calculation under the reserved rights (allowing for the taper factor) is higher than the proposed terms then members in this category will receive the relevant proportion of their reserved rights.

Departures on these terms will have to be individually authorised by the Cabinet Office. 

9. What about members over normal pension age?

The cap on benefits for members over normal pension age (ie 60 for members of Classic, Classic Plus and Premium, 65 for Nuvos) is 6 months' pay.

10. Is there any tapering of benefits?

Yes.

For those under normal pension age the cap on benefits on voluntary redundancy is 21 months' pay subject to the payment not exceeding 6, plus the number of months from the last day of service to normal pension age, months' pay. The effect of this is to taper the cap of 21 months' pay down by 1 month from the age of 58 years and 9 months.

For those under normal pension age the cap on benefits on compulsory redundancy is 12 months' pay subject to the payment not exceeding 6, plus the number of months from the last day of service to normal pension age, months' pay. The effect of this is to taper the cap of 12 months' pay down by 1 month from the age of 59 years and 6 months.     

11. Are the proposed terms not age discriminatory?   

The value of benefits vary with age in a number of cases, particularly between 49 / 50 and above 58 years and 9 months when the cap on benefits are first tapered and then set at 6 months' pay. These differences are potentially discriminatory on the grounds of age. The law allows for age discrimination where it can be justified. The Cabinet Office believes that such discrimination can be justified and hence can be defended against legal claims for age discrimination. It should be remembered that many of these features simply replicate terms in the current scheme. Prospect takes the issue of age discrimination very seriously and has taken successful cases on age discrimination in the CSCS to tribunal in the past.

12. I understand there has been a recent European judgement on the issue of age discrimination in redundancy schemes, does this affect the CSCS proposals?

A European Court Judgement, the case of Andersen vs Region Syddanmark has been published very recently.  It is based on a case of a Danish worker who was employed by a regional council.  As soon as we became aware of the ruling we asked for legal advice on its implications and also asked the Cabinet Office for their view on whether it had implications for the CSCS. We also delayed the ballot on the new terms to allow for the implications to be properly assessed. Our legal advice is that the ruling may not have a direct bearing on the terms being balloted on and is not an impediment to the ballot proceeding. The position will only be known for certain if aspects of the revised terms are directly challenged.        

13. Will Prospect support age discrimination cases in relation to the CSCS terms being balloted on? 

As in all such circumstances, Prospect will look at the merits of the case and the chances of success in arriving at a decision to support cases or not. 

14. Why are the voluntary terms better than compulsory terms?

The government insisted on making voluntary terms better than compulsory terms to manage departures in what they believe will be a more orderly way. This means that members can volunteer to take redundancy when and if a scheme is announced. If there are insufficient volunteers, the employer will look at selection criteria for ‘enforced' redundancies, at which point members can still volunteer for voluntary terms. Whilst we do not accept the government's arguments supporting this point, in practice voluntary terms are likely to become the ‘norm' for the vast majority of releases.

15. So, what discretion do departments have on the voluntary terms?

In the first instance, employers running an early release scheme have discretion to vary the terms on offer. These may range from the statutory minimum - which is the least that can be offered - to unreduced pension for the over-50s and an improved accrual rate of more than the standard tariff of one month per year. Any improved terms for the under 50s will be subject to the cap of 21 months.

If there are not enough volunteers in this sort of ‘voluntary scheme' then the employer will enter formal consultation on ‘enforced' redundancy, at which point they will have to offer the full Voluntary Terms to members who are ‘at risk' of redundancy. All staff who are facing enforced redundancy on the new Compulsory Terms will have to be given the option to opt for ‘voluntary' release on the better terms.

16. When do the new terms come in?

Prospect will be balloting on the new arrangements and, if the new terms are accepted, they will come into effect from 1 December 2010, subject to the Parliamentary timetable and Royal Assent. Up until this date, the current terms will continue to apply, although it is fair to say that few Civil Service employers are likely to invoke the existing scheme until the new terms come into effect.

17. What happens if members reject this offer?

If members reject the offer, we can only anticipate that the current provisions of the Superannuation Bill will proceed in line with the proposed Parliamentary timetable. This means that all compulsory redundancies will be capped at 12 months' pay; all voluntary redundancies will be capped at 15 months' pay; there will be no discretion on improved accrual rates and AER will not be available. The Civil Service Executive Committee will then need to consider the scope for a campaign of industrial action amongst members covered by the Civil Service Compensation Scheme, together with what, if any, scope there is for legal action.

18. Will the Government re-open negotiations if members of the 5 unions reject the offer?

The Government has made it clear that, if members reject the offer, it will not re-open negotiations. Indeed, after our experience with the withdrawal of the February agreement, Prospect would be very wary of any offer from the Government to re-open negotiations as this could put at risk the improvements that we have secured over and above the provisions of the Superannuation Bill. The clear danger in these circumstances is that the government will revert to the caps in the Superannuation Bill.

19. PCS successfully challenged any changes to the Civil Service Compensation Scheme through a Judicial Review in April - how can this now be overturned?

The judgement that was made as a consequence of the Judicial Review in May was predicated on the provisions of Section 2(3) of the Superannuation Act 1972. This effectively meant that the Government, at that time, acted illegally in failing to secure the agreement of all constituent unions on changes to the Civil Service Compensation Scheme. As predicted by Prospect at the time, the Government is now amending this section of the Act. Therefore, the basis for a challenge on these grounds in the future will no longer exist. See news update at http://www.prospect.org.uk/members_areas/sector/CVL/message/411

20. Can the Government change this Act without agreement?

Ultimately, no court can stop Parliament passing further primary legislation to amend this Act if it chooses to do so, and this may well be the case in the advent of any future challenges.

21. If we do not pursue a legal challenge, will PCS challenge the detail of this offer?

This is a matter for PCS, although all indications on their website suggest that they are considering this option. As we understand it, any challenge will be made under the European Convention on Human Rights. This route is likely to prove complex and challenging with a number of potential responses open to Government. The Government's defence of such a challenge could include the state of the current public finances and the requirement to review fiscal policy. Our own experience with the European Courts is that any ‘references' are unlikely to achieve a speedy conclusion, and could take several years.
There is also growing evidence that the European Court is disinclined to substitute its judgement for that of a member state, except where it finds technical breaches of specific EU directives.

22. Surely delay would suit us because the current terms would prevail?

No, a legal challenge will not stop the Parliamentary process. Even if a challenge was successful, the European Court can only make retrospective judgements. That would mean that any judgement could award compensation backdated, to the point at which the change was made

23. What is the position of the 5 unions involved?

All 5 unions have consulted, or are currently consulting, their Executive Committees, with a view to seeking a recommendation to ballot their members. So far, only POA has decided not to recommend the offer for acceptance.

24. Is PCS balloting members?

PCS has indicated that it will ballot its members on this issue in conjunction with its wider campaign on public sector jobs and pay, but will be recommending rejection of the offer.

25. Why is Prospect recommending it?

The Civil Service Sector Executive Committee believes that members should be in no doubt what the Government's plans will be for the Civil Service Compensation Scheme in the event that these proposals are rejected.

Prospect has argued vigorously throughout the negotiations for the provisions of the ‘February' agreement to be re-tabled, but the Government refused. On that basis, the Executive felt it was important to try and reach a conclusion based on the best terms that could be achieved through negotiation. Parts of the current offer are below that of the February agreement, but some parts including the ongoing availability of an unreduced pension are improvements on the February position. This proposal is, it believes, the best that can be achieved by negotiation.

The CSSEC also believes that this negotiated agreement is likely to be better than any outcome that would be achievable through industrial action or the legal route.

26. What has been the role of PCS in this?

It is regrettable that PCS did not play a fully active role in the final part of negotiations. There have been a number of opportunities for them to make specific proposals; to date they have declined to do so. No union is defending the fact that the terms currently on offer are in any way as generous as the current terms or, indeed, parts of the terms that were available in February. However, Prospect did not believe that non-engagement in negotiations would provide a solution or serve the interests of our members in the face of Government policy which is intent on change to the Civil Service Compensation Scheme.

27. What about the detailed amendments to the scheme, when will we see these changes?

The full details of the amendments to the Scheme are currently being drafted and the CCSU will be given the opportunity to comment on these changes, as was the case in February.

28. Why has the notice period for PILON changed from 6 months to 3 months - surely this was contractual?

The proposals do provide for the contractual minimum notice period to change from 6 months (or, currently, 9 months for the over-60s) to 3 months. But this will now be extended to all redundancy, including voluntary redundancy. Under the current provisions, PILON is not payable under a voluntary scheme - as the exit date is by mutual agreement. Employers will now have the ability to offer PILON in a voluntary scheme to allow members to either leave on an agreed date and be paid PILON, or to work their notice period.

29. Will members be able to participate in a ballot on the offer?

Yes. Precise details of arrangements will follow.

30. Will the proposed terms apply to members in Nuvos and Partnership?

Yes.

31. If I qualify for an early pension can I take the lump sum instead?

Yes.

Perhaps a more helpful way of looking at the package is to view it as an entitlement to (up to) 21 months' pay.  Members can use as much of that as necessary to buy out any reduction on taking their pension immediately (but they do not have to do so). If they choose an unreduced pension and the cost of buying out the reduction is less than the standard redundancy terms they keep the difference as a compensation lump sum. If the cost of buying out the reduction is greater than the standard redundancy terms then the extra cost is met by the employer.

32. I transferred service into the civil service pension scheme, will this count towards redundancy benefits?

This depends; only current reckonable service (ie latest period of service with the civil service or bodies covered by the CSCS) will count towards redundancy benefits as of right (as is currently the case for most civil servants). Cabinet Office approval is needed for transferred in service with other employers to be included in the calculation of redundancy benefits.

Transferred in service will obviously always count towards pension benefits. 

33. Is payment in lieu of notice counted towards service in the pension scheme?

No. However, as is currently the case, there is an extra element of compensation on top of the notice pay to reflect the value of the pension that would have been accrued during the relevant period.

34. Do part years of service count towards redundancy benefits?

Yes - part years of service count pro-rata. So a member with 10 years and 6 months service would qualify for a payment of 10.5 months' pay under the standard terms.

35. I am over 50 and in the Classic section of the pension scheme - do I have to use my pension lump sum to pay for the unreduced pension on redundancy?

No - only the redundancy compensation (ie up to 21 months) is used to buy out the actuarial reduction on pension. If the cost of this is more than the redundancy lump sum then the employer must make up the difference in a redundancy situation. The pension lump sum is paid unreduced along with the pension (and this is 3 times the pension). Any other lump sum (eg return of contributions for single members) is also protected and not used to buy out the actuarial reduction on the pension. 

36. How do I work out the cost of buying out the actuarial reduction on my pension and pension lump sum?

The cost of buying out the actuarial reduction in order to take a pension and any pension lump sum unreduced on redundancy depends on your age and your length of service. The younger you are the higher the actuarial reduction is and the more expensive it is to buy this out. The more service you have the higher the pension and therefore the bigger the actuarial reduction and, again, the more expensive it is to buy out. For someone aged 50 with a lot of service the cost of buying out an actuarial reduction can be well over 3.5 times annual salary. On voluntary terms the employer has to pay the extra cost of buying out the reduction in a redundancy situation.

The latest issue of Public Eye contains a table (on page 3) that gives estimated costs of buying out actuarial reductions for different combinations of age and length of service.

For a more individual calculation it is possible to use the following calculator on the civil service pensions website to get an idea of the value of an unreduced pension:

http://www.civilservice.gov.uk/Assets/Actuarial_Reduction_100pc_Buy-out_Calc_tcm6-36945.xls