Date posted: 01/04/2011
Audience: This Notice will be of particular interest to:
- HR staff dealing with early departure exercises
- Payroll managers
- Note the contents
- Notify your Pension Service Centre (PSC) of the rate of pay required to cap the inefficiency payment.
- Once you have made a decision to dismiss a member of staff on grounds of inefficiency, employers must determine whether compensation should be paid and, if so, how much. The maximum amount of compensation that may be paid is set out in Section 11 of the CSCS. Guidelines for assessing compensation are given in Personnel Information Note (PIN 40) attached. When the maximum compensation is payable, members of classic, classic plus and premium age 55 or over have in the past been able to forgo their compensation payment and instead receive an immediate unreduced pension.
- Recent changes to the CSCS arrangements have had two impacts on the compensation payable on inefficiency:-
- The caps on compensation imposed by the Superannuation Act 2010 apply and
- The PCSPS rules no longer provide for classic plus and premium members aged 55 or over who receive the maximum compensation to opt to receive an immediate unreduced pension, and classic members can only receive an immediate unreduced pension if the cost is less than the cap.
What is the cap?
- The Superannuation Act 2010 introduced caps on the cost of benefits payable under the CSCS. The Superannuation Act 2010 (Repeal of Limits on Compensation) Order 2010 repealed the caps in respect of compensation payable under provisions introduced on or after 16 December 2010, including the new voluntary exit, voluntary redundancy and compulsory redundancy arrangements introduced from 22 December 2010. However, because inefficiency terms are not included in the new scheme, the caps still apply in respect of compensation payable on inefficiency.
How will the cap apply?
- Compensation must be capped at 12 months’ pay for anyone who was given notice of dismissal on the grounds of inefficiency on or after 16 December 2010. For this purpose, “pay” is the annual rate on which the person was required to pay pension contributions under the PCSPS immediately before dismissal. For people who were part-time immediately before dismissal, the rate is the actual part-time rate on which they were required to pay contributions. Your payroll will be able to provide you with both the full time and part-time, annual rate of pay that your employees pay pension contributions on.
If the employee was not a member of the PCSPS, or was on a reduced or nil rate of pay, the figure used to determine the cap is the rate on which they would have been required to pay contributions on if they were a member or they were receiving their normal rate of pay. If they were employed on or after 1 June 1989, and their rate of pensionable earnings is limited by the earnings cap (permitted maximum), the figure used must ignore that limit.
To enable your Pension Service Centre to calculate the cap, you will need to provide them with details of the rate of pay (as defined above).
Option for immediate early pension
- The PCSPS rules no longer (from 22 December 2010) provide for classic plus and premium members aged 55 or over who receive maximum compensation to opt to receive an immediate unreduced pension. Further guidance will be issued to employers about this as soon as possible but, in the meantime, if anyone has already been given this option or is enquiring about this option, please contact the employer helpdesk who will seek advice from the Scheme Management Executive on your behalf.
classic members aged 55 or over who receive maximum compensation can opt to receive an immediate unreduced pension, but if the cost under the actuarial buyout exceeds 12 months’ pay, under the Superannuation Act cap, their pension benefits will be preserved and they will receive a lump sum compensation payment of 12 months’ pay instead.
Compensation that has already been paid
- If anyone who was given notice of dismissal on or after the 16 December 2010 but whose last day of service was before 4 April 2011, has already received their compensation in excess of the cap of 12 months’ pay, we will not seek to recover the excess compensation. HM Treasury have agreed that the excess in each case should be treated as a special payment and have provided approval for these payments. This does not apply to those who have not yet received their compensation or those that were given notice on or after the 16 December, but who were still in service on 4 April.
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