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New guidance on special severance payments

The Treasury has issued new guidance which relates to 'Special Severance Payments' (SSPs) made by public sector employers to their employees, setting out the criteria that should be considered and steps to take to obtain Treasury approval. Mark Stevens reports.

According to the Treasury, the SSP system costs the Government millions of pounds, and so it is vital that they are made only when there is a "clear justification for doing so" to make sure that the taxpayer is fairly funding them. Employers should also be careful that SSPs are properly documented in order that the process followed is transparent.

The guidance follows the Government's decision in March 2021 to revoke the Restriction of Public Sector Exit Payments Regulations 2020, which introduced a £95,000 cap on severance payments in the public sector.

What Is a 'Special Severance Payment'?

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The guidance says that SSPs are those payments made to employees, officeholders, workers, contractors and others on an exit, outside of normal statutory or contractual requirements, including but not limited to an ex gratia or settlement payment.

The guidance states that: "Any payment in respect of which the right is disputed by the employer, in whole or in part, should be treated as a Special Severance Payment which requires approval." For example a pension strain cost may constitute an SSP depending on the circumstances.

It is the responsibility of the public sector employer, as well as that of the sponsoring department, to ensure that the SSP arrangements are "fair, proportionate and lawful".

Special Severance Payments - Criteria

The Treasury's new guidance lays out the criteria that employers should consider before making an SSP, the control processes involved for relevant SSPs and the reporting and transparency requirements.

The criteria vary depending on the terms and conditions of the SSP. The guidance lays out a number of examples of what might constitute an SSP.

In addition to this, the guidance outlines that the following criteria should be considered:

  • The circumstances of the case
  • Financial considerations
  • Non-financial considerations
  • Repercussive risk
  • Particular consideration for settlement agreements

Special Severance Payments - Control Processes

The guidance says that SSPs require Treasury approval because they are normally "novel, contentious and potentially repercussive. Such payments can appear to reward failure and set a poor example for the public sector generally."

The guidance states that the Treasury should always be warned in advance of making a payment, and/ or of making offers to pay, whether oral or in writing. The guidance also sets out the process that the public sector employer must follow to obtain the requisite Treasury approval. The guidance also includes the form that employers must complete to justify the payments being offered to exiting employees.

Transparency and Reporting

According to the guidance, SSPs should be reported in accordance with existing guidance on reporting exit payments and SSPs. Employers are required to disclose in their annual accounts information about all exit payments paid during the financial year, including the relevant band that the payment falls into.

Mark Stevens is a Senior Associate at VWV.

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