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There is a pay problem throughout much of the public sector – something that is having a knock-on effect on recruitment and service levels, experts in the area say.
In 2023, the Government’s target for recruiting secondary teachers was missed by half while there were widespread strikes by the National Education Union (NEU) in response to a rejected pay offer. Again this year, members of the NEU have voted to hold a formal strike ballot if they reject this summer’s pay offer.
In the Civil Service, think-tanks have said that pay is having an impact on recruitment of high-quality candidates. The Institute for Government (IfG) has found that every Civil Service grade has seen a reduction in real-terms pay of 12 to 26 per cent between 2010 and 2023, with senior staff seeing the biggest cuts.
“Low pay makes joining the Civil Service less attractive,” says the institute’s Whitehall Monitor report. Its research found that “even Civil Service salaries in Darlington are uncompetitive, despite local private-sector salaries being lower than in London.”
Meanwhile, in parts of the NHS, discontent with pay is clear. Junior doctors have voted to continue striking until September, and are seeking pay rises of 35 per cent.
It’s fairly obvious that no Government – Conservative or Labour – is going to massively increase pay in these sectors.
“No Government is going to totally open the taps on civil servant pay – they’re not going to want to sign that cheque,” explains Alex Thomas of the IfG.
The simple reason is that the Government has rules to meet – its “fiscal rules” to be exact. For a significant increase in spending on public-sector wages, money would have to come from elsewhere. A difficult thing to square for an administration brandishing its tax cutting credentials.
The Opposition has been upfront on this too. Labour leader Sir Keir Starmer has regularly referenced the importance of meeting fiscal rules when ruling out certain spending commitments in recent months. A huge splurge on public-sector pay does not seem likely to be high on his agenda, either.
So what’s left? According to some, the answer could lie in pensions.
While those in the private sector generally now save into “defined contribution” schemes – pots that are invested – the public sector still has a type sometimes referred to as “gold plated” – “defined benefit” schemes.
Their retirement income is guaranteed. While private-sector workers have to take responsibility for using their own pension pots throughout their later life, most public-sector staff accrue an annual income in retirement based on their salary and length service – something almost all private employers have now ditched because of the huge costs involved.
To some extent, the difference in the pensions makes up for this difference in pay.
In fact, the IfG found in a recent report that pensions make up for nearly half of the deficit between senior civil service pay and private-sector equivalents.
A typical 52-year-old senior civil servant in the “SCS1” pay band on a salary of £78,500 has an annual pension contribution “worth” £18,300 of additional salary compared to the equivalent private-sector worker.
This means that, when taking pensions into account, a worker in the private sector would need to earn £96,800 to match the overall financial value of the official’s £78,500 salary plus pension.
But to a 25-year-old splurging half their salary in rent, or others struggling with the cost of living crisis, this lure of a comfortable retirement will likely come as little solace.
In fact, many in the public sector will bemoan the lack of flexibility with their pension. In the private sector, to be part of a company’s retirement scheme, most employees have to contribute a minimum of 5 per cent of their salary, but the figures can be far higher for those in our schools and hospitals.
In the Teachers’ Pension Scheme, someone on an average salary of £35,000 would have to pay in 8.6 per cent of their salary – with no option to reduce – while for the NHS scheme it’s 9.8 per cent.
As a result, many staff are opting out of their pensions entirely. A generous pension scheme is no good if you can’t afford it.
Could smaller pensions but higher pay help?
One answer to this conundrum, is whether the dial could be shifted on public-sector pay, so that staff get smaller pensions but higher pay.
Experts certainly think it would help.
“What’s clear is that the DB nature of the teachers’ pension makes it probably very generous in relative terms and costly for government, while the teaching workforce at the moment is relatively young and therefore may value the long-term benefits of a generous pension less than the current benefit of pay,” says National Foundation for Educational Research (NFER) economist Jack Worth.
“There is a case for considering whether the balance between pay and pension is optimal, and resource could be shifted towards pay to give a cost-neutral boost to retention.”
Those with expertise in the Civil Service agree. “Exploring these sorts of flexibilities, is perhaps one of the only ways we can go,” explains Alex Thomas of the IfG.
“Perhaps one way is frontloading a bit more of that pay, or at least giving the opportunity for civil servants to have a higher salary and lower pension without opting out entirely. It would make the jobs more competitive,” he adds.
NHS specialists also believe it is something worth trying.
“For newly qualified doctors, nurses and other clinicians, who are often saddled with eye-watering student debt, they may be more motivated by upfront pay rather than pension contributions, and unless the NHS matches packages of independent or overseas workplaces then we risk losing more of our valuable staff”, says Billy Palmer, senior fellow at the Nuffield Trust.
“We recently found that only one in 10 young people report that pension contributions are a main factor when thinking about their careers, whereas over a quarter reported longer-term pay as a key motivation.”
How could it work and what are the downsides?
Most public-sector staff build up their pensions each year based on a portion of their income. As an example, with the TPS, you get 1/57th of your annual salary each year in retirement, for every year you work. If you’re a teacher on £35,000, you’ll get £614 a year – adjusted to increase by inflation plus 1.6 per cent – in retirement, for every year you’ve worked.
“One way to change things is to say your total package is X, the split will be more towards pay and less towards pension,” says Steve Webb, former pensions minister and now consultant at LCP.
As a teacher, you could accrue a lower amount in your pension – say 1/60th instead of 1/57th – and instead get a higher salary. You could also say that staff have to pay less in to the scheme instead, so perhaps 7.6 per cent, instead of 8.6 per cent of their salary.
However, the way that public-sector pensions are funded means that a change to the system is not necessarily simple, and indeed over the short-term may not be cost neutral.
When you pay into a pension in the public sector, your money, along with your employer’s contributions, is not going into a pot for you in retirement, as they are in the private sector. They are used to pay the pensions of people claiming today.
If we lowered contribution rates, it could create a problem funding today’s pensions, which may have to be recouped in other ways.
“Are the public going to be happy with a tax rise, because we have a bill for retired people and no money to pay for it?” asks Sir Steve.
Similarly, a lower accrual rate with higher pay could cost more upfront now, although it would of course be cheaper in 30 or 40 years’ time when we come to pay out the lower pensions.
“If you are rebalancing pay away from pensions, and towards take home pay, although although that’s cost neutral in the long run, it could mean giving more money today and less money in the future. So it’s not cost neutral in the short run,” explains Laurence O’Brien of the Institute for Fiscal Studies think-tank.
But despite that, experts say it’s worth pursuing. “There’s a pretty good case for some sort of rebalancing,” says O’Brien.
The challenge, says Sir Steve Webb, could come in cutting the finer details.
Major reforms to public sector pensions were undertaken in 2015, with a key change being the move from final salary to career average accrual – which in broad terms, made these pensions less generous, though more sustainable.
“What’s funny is that people outside of the public sector think that public sector pensions are gold plated. People in the public sector think their pensions have been slashed. If you say to them it’s going to change and get worse, it’s a difficult deal to cut,” says Sir Steve.
But though the changes may be tricky to strike a deal on, there’s certainly something to be done, for a Government prepared to undertake it.
