Public Sector Pay

May 17, 2017 9:54 AM

Since 2010, the government has been largely successful in its attempts to restrain public sector pay. A considerable gap between public and private sector weekly earnings opened up during the 2000s which has largely been closed by limiting pay increases.

The problem of national pay bargaining in the public sector persists, however. It is a major distortion and has significant fiscal costs. It leads to pay public sector employees in low cost areas being paid excessive salaries because the cost of living is higher elsewhere in the country and crowding out the private sector in poorer regions.

Scrapping national pay bargaining would end excessive public sector salaries in areas like the North East. It would also lead to higher pay for staff in London and the South East, but even this could save money because currently many public sector employers (especially NHS trusts) are forced to hire expensive agency staff as they are unable to recruit at uncompetitive national pay rates. A study from the LSE has shown that centralised pay bargaining has a significant effect on heart attack death rates.

In 2012 Policy Exchange estimated that £6.3 billion could be saved by introducing local pay bargaining.

Some progress was also made with public sector pensions which have traditionally been more generous than in the private sector to compensate for lower public sector wages. Public sector pensions are worth five times as much as those in the private sector. Some progress was made with schemes moving to a career-average basis and an increase in retirement ages, but more reform is needed.

As of March 2015, public sector pension liabilities stood at £1.5 trillion making it the single, largest liability on the government’s balance sheet. It has risen by around a third since 2009-10.

Last year taxpayers had to plug the gap in scheme payments and receipts to the tune of £11.5 billion. By 2021-22 £15.7 billion will be needed. Unions say that the problem is low private sector pensions and the solution is to “level up” but this is unrealistic. If an NHS nurse wanted to match their NHS pension through a private defined contribution system they would have to make contributions equal to 43 per cent of their gross salary as opposed to 7.1 per cent.

An inquiry should be launched into the feasibility of switching public sector pensions to a national defined contribution basis. In the meantime retirement age increases should be accelerated and employee contributions increased.

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