Since 2010, the deficit has reduced from £181.5 billion to £23.3 billion in constant prices. Part of the way in which this has been achieved is through reducing the public sector headcount and restraining pay. In the same period, the number of public sector workers has fallen from 6.4 million to 5.4 million and the public sector staff costs have fallen in real terms from £224.5 billion in 2010-11 to £202.2 billion by 2016-17. The latter was achieved by freezing public sector pay rates (as distinct from individuals’ pay packets) for two years and then capping increases at 1 per cent. The government has since announced the end of the 1 per cent cap.
During the 2000s, public sector employees saw their pay increase far faster than their private sector counterparts. By 2010, the average public sector worker was paid 4.3 per cent more than the average private sector worker but the latest figures show this has now reversed and the average private sector worker earns 1 per cent more.
The pensions landscape
This is, however, only part of the story. Despite some reforms proposed by the Independent Public Service Pensions Commission, which were vehemently opposed by trade unions, such as the move towards career averages rather than final salaries and changes to accrual rates, public sector pensions remain vastly more generous than those on offer in the private sector. Previous research has shown that in the private sector, a contribution rate of 30 per cent of their gross pay a year would be required to for a worker to enjoy the same benefits as they would in the public sector.
During the period of pay restraint, public sector pension liabilities increased from £1,157 billion in 2011-12 to £1,942 billion in 2016-17 in real terms. Despite increases in employer and employee contribution rates, HM Treasury is spending more than ever to plug the shortfall between contributions and expenditures – in 2018-19 it is expected to inject £12.6 billion into the main public sector schemes.
The increasing cost of public sector pension schemes will continue to increase costs for private sector employers. For example, the employer contribution rate for the Teachers’ Pension Scheme is set to increase from 16.48 per cent to 23.6 per cent in September 2019. These increases are being driven by the government’s belated but welcome moves toward using a more realistic discount rate, however the cost of these schemes to taxpayers remains disguised.
Despite the end of the 1 per cent pay cap and the government’s claims that “austerity is over” the kinds of pay increases public sector workers became accustomed to in the 2000s will not be possible without very significant additional borrowing and/or significant increases in taxation.
The tax burden is at a 50-year-high. Given this, and the government’s reluctance to continue restraining public sector pay, it makes little sense for public sector workers to simultaneously accrue extremely generous pension rights, whilst also calling for significant pay increases. Instead, these rights could be exchange for generous pay increases. We therefore propose a pensions opt-out scheme for public sector employees:
Public sector workers should be given the option to fully or partially opt-out of their pension at the beginning of each financial year.
In return for sacrificing pension rights, employees would not be required to make contributions proportional to the size of their opt-out.
They would then receive the corresponding share of the employer contributions as part of their salary.