Severance payments to senior staff in higher education institutions

To:

Heads of HEFCE-funded higher education institutions

Dear Vice-Chancellor or Principal

1.   This letter updates our guidance on severance payments to senior staff in higher education institutions (HEIs), last published in 2002 (HEFCE Circular letter 21/2002). Senior staff are defined as those earning in excess of £100,000 per year. This limit is reviewed from time to time and any changes announced in the accounts direction to HEIs, published annually (HEFCE Circular letter 16/2008). The accounts direction also sets out how severance payments should be reported in published financial statements.

Background

2.   We initially issued guidance on severance payments following a requirement to do so imposed by the Committee of Public Accounts (PAC) in its 28th report, 'Severance Payments to Senior Staff in the Publicly Funded Education Sector', published in 1995. Requirements set out at that time still apply today. However, in the intervening period all HEIs have established remuneration committees and the responsibility of members of governing bodies in severance and other remuneration matters has been clearly set down in the Guide for Governors (HEFCE 2004/40) published by the Committee of University Chairmen (now the Committee of University Chairs). These developments have enabled us to prepare this simplified guidance.

Severance principles

3.   The principles that should apply when decisions are taken about severance payments in HEIs are as follows:

1. The actions of those taking decisions about severance payments and those potentially in receipt of such payments should be governed by the standards of personal conduct set out by the Committee on Standards in Public Life (the seven Nolan Principles¹). With particular reference to severance arrangements, the principles require both openness and accountability.
2. The governing bodies of HEIs must, in accordance with the Financial Memorandum with HEFCE (HEFCE 2008/19):
   • exercise reasonable discretion in the use of public funds
   • ensure that public funds are applied only for the purposes intended
   • set a high standard of financial propriety
   • secure value for money.
3. The governing bodies of most HEIs, as trustees of charities under their 'duty of prudence', must use charitable funds and assets reasonably, and only in furtherance of the charity's objects.
4. A HEI considering severance payments needs to ensure that it is it is being fair and equitable in its decision-making about different groups of staff.

Severance requirements

4.   The requirements to be met when considering severance payments, based on the principles set out above, are that:

1. Severance packages should be based on contractual entitlements, and any applicable statutory employment entitlements. This means that, when entering into employment contracts, remuneration committees should take care not to expose the institution to excessive potential liabilities.
2. Negotiations about severance packages and payments should be informed, on both sides, by appropriate legal advice.
3. When a severance arises following poor performance on the part of an individual, any payment should be proportionate and there should be no perception that poor performance is being rewarded.
4. Final-year salaries should not be inflated simply to boost pension benefits.
5. Enhancements to severance packages should not be provided out of public funds. Non-public funds should only be used for this purpose where it is permissible and reasonable to do so and is accordance with the use of charitable funds.

Confidentiality clauses

5.   The final requirement that needs to be considered in greater detail than those set out above concerns the subject of confidentiality clauses. Confidentiality clauses can require both sides not to disclose the terms of the agreement or the circumstances leading up to the severance. In the private sector this is thought, on balance, to be a cost-effective way of resolving disputes to the satisfaction of both sides and allowing the organisation to move on. HEIs also need cost-effective solutions and to be able to move on, but this has to be balanced by public requirements for accountability and openness. This is a potentially very difficult issue for HEIs and one where there are risks - to the institution, to the individual concerned in a severance and to the public interest - in imposing a standard, simplistic requirement. HEIs are of course subject to the Freedom of Information Act and there can be no absolute certainty that a confidentiality agreement would prove legally binding in the judgement of the Information Commissioner.

6.   Our guidance to HEIs is that compromise agreements that include confidentiality clauses are acceptable but they should be the exception rather than the norm. The National Audit Office (NAO) published guidance on 'Ending a Contract of Employment on Enhanced Terms' in 2007 in which it made clear that any confidentiality clause should 'not prevent the wider public interest being served'. HM Treasury published guidance for accounting officers in 2005 (DAO(GEN) 11/05) which set out that 'any undertakings about confidentiality should leave severance transactions open to adequate public scrutiny, including by the NAO and PAC'. This means that both sides in a severance agreement should understand that any information covered by a confidentiality clause will need to be disclosed, on demand, to the HEFCE Accounting Officer or the NAO. This is consistent with the Nolan Committee's Second Report on local public spending bodies which, in respect of HEIs, recommended that where confidentiality clauses were deemed absolutely necessary, legitimate concerns about potential malpractice could be raised with HEFCE or the NAO (as well as, where applicable, the Visitor or an independent review body).

7.   HEIs are not public bodies in the sense of the NAO and Treasury guidance but the requirements do apply because it is public money that is at issue and any inappropriate or improper severance decisions could result in criticism from Parliament. If in doubt, institutions are invited to contact the HEFCE Chief Executive for advice in this area because he/she is the Accounting Officer answerable to Parliament for HEIs' use of funds.

Summary

8.   The requirements set out above should be sufficient to help remuneration committees make decisions about severance payments and agreements. We accept, however, that each case is unique and has to be judged on its merits. On occasions it might be difficult, for example, to strike a balance between a particular level of payment and the risk of greater cost should a case end up at an employment tribunal. At the same time severance payments should not substitute for managing poor performance. Our advice to governing bodies and remuneration committees is always to bear in mind the principles set out above and to record clearly the rationale behind their decisions.

9.   Any enquiries concerning this guidance should be addressed to HEFCE's Head of Assurance, Paul Greaves (tel 0117 931 7378, e-mail p.greaves@hefce.ac.uk).

Yours sincerely

Professor David Eastwood
Chief Executive

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Note

Details of the Nolan Principles can be found on the web-site of the Committee on Standards in Public Life.

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