Want to hike public sector pay? End the pensions apartheid

Graeme Leach
National Strike By Civil Servants
If there is enough pressure, the government will cave in (Source: Getty)

Any tourist landing in the UK this week and watching the news must have a terrible impression of the pay of workers in the public sector.

They must be phoning back home with the news that Britain is the land of public and private sector pay apartheid. But they’d be wrong, very wrong. Rather, Britain is the land of pensions apartheid.

But let’s deal with pay first.

Read more: The Tories have one way out of the public sector pay dilemma

When the BBC’s Reality Check acknowledges that Lord Lamont was right to claim that public sector pay is on average higher than in the private sector, even adjusted for qualifications, we should sit up and take note.

Lord Lamont was quoting figures from the IFS showing that average hourly wages (in 2015-16) were 14 per cent higher in the public sector than in the private sector. The adjusted figure, allowing for differences in qualifications, showed a smaller gap of four per cent. But as my colleague on this page, Paul Ormerod, has pointed out previously, using the adjusted figure smacks of the Soviet era with inputs equated to outputs.

Yes, the continued pay cap will result in a reduction in the public sector premium (using the unadjusted measure), but there will still be higher wages in there than in the private sector. Allowing for public sector pay to rise in line with the private sector would cost over £6bn per annum by the end of this Parliament, according to the Office for Budget Responsibility.

But there’s a much simpler question. Can we afford it? Private sector pay doesn’t increase when the company is losing money. In 2010, we were told the budget would be balanced by 2015. Then we were told it would be by 2020. We’re now told it will be 2025, and if the government caves in on public sector pay the date will probably end up being 2030.

Of course, the political reality is that if there is enough pressure, the government will cave in. And this weakness needs to be turned into an opportunity.

Instead of a one per cent pay cap, the government could say that it will increase the budget for public sector pay in hospitals and schools by two per cent. But here’s the catch. Note that I said the pay budget, not pay awards. The price of more pay should be the end of national collective bargaining. Headteachers should decide teachers’ pay, not the chancellor of the Exchequer.

A school could get a two per cent increase in the pay budget but it would then be up to the school to decide who got zero and who got four per cent.

Decentralising public sector pay is the critical first step in linking pay to performance. The unions will go crazy, but this is a battle which needs to be fought, and needs to be won.

If the Prime Minister had won a big majority, this might have been doable. Now, with a minority government and a rebellious cabinet, it won’t see the light of day. So how else could the government defend the pay cap?

The answer is by focusing on public sector pensions in comparison to those available in the private sector.

Calculations by Tilney Bestinvest highlight the magnitude of the differential between public sector defined benefit and private sector defined contribution schemes. On average, the income provided by public sector schemes is five times more generous than a defined contribution pension in the private sector.

Focusing on one specific example, a nurse working in the public sector for 40 years could obtain annual pension worth two thirds of final salary, index linked, by contributing seven per cent of their annual salary.

In the private sector the nurse would have to save an astonishing 43 per cent of their salary to achieve the equivalent benefit. That’s what you call pension apartheid.

Read more: BoJo: Pay cap can be lifted "without causing fiscal pressures"

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