14 April 2006
Below-inflation staged pay awards. A new government committee to vet all deals. Is this an incomes policy in all but name? Alastair Hatchett explains why and how the Treasury is getting tough on public sector pay
The government has created consternation at the top of the public sector pay tree with its decision to award increases of just 1% to hospital consultants, judges and senior civil servants from April 2006, with the rest of the recommended increases (1.2% for hospital consultants) to be paid in November.
Paying rather modest awards in two even more modest stages was never going to be well received. And the senior civil servants union, the FDA, was quick to complain. Describing the move as a return to the pay policies of the previous Conservative government, FDA general secretary Jonathan Baume says: 'There will be real anger at the government's decision to stage a review body pay award for the first time since 1997, particularly when the award itself is significantly lower than is required to tackle the growing gap between the pay of senior civil servants and other managers and professionals in the wider public sector.'
The decision also 'undermines the credibility of the independent Senior Salaries Review Body,' he adds, 'which has spent months examining the issues relevant to this year's pay award'.
So what is the government up to? Overall, it wants greater co-ordination and centralised control of pay decisions across the public sector. It also wants to limit pay rises in 2006 to an average of 2.25%. To achieve this, it has established a new committee, known as the 'pay gateway', to oversee all significant public sector pay rises. The Public Sector Pay Committee is tasked with 'improving the consistency and quality of the information base on pay'.
Governments have always kept a close eye on public sector pay, but the creation of the committee is a new development and the intention clearly goes beyond monitoring. Although described as a 'pay gateway', it is uncertain whether it really is a gateway or more of a roadblock. Some civil servants have unkindly suggested that passing through it is as likely as going through the 'eye of a needle'.
The first sign that the pay gateway was in operation was the extraordinary delay in the publication of the pay review body reports for 2006. These are normally published in mid-February, apart from the report for the school teachers, published in autumn 2005 on a different timetable. This year, only the Armed Forces Pay Review Body recommendations were published in early February, awarding 3%–3.3% from April 2006. The reports and awards for doctors and dentists, nurses and other health professionals, the prison service, judges and senior civil servants were held back until the last week of March.
The delay appeared to reflect a tussle over whether or not to implement the bodies' recommendations. But it might also have been to manage expectations downwards. In the event, the nurses received 2.5%, matching the current retail price index inflation of 2.4%, junior doctors received 2.2% and consultant doctors are having their award staged, with 1% from April and 1.2% from November. This is at a time when the median increase in the private sector is 3%, according to Incomes Data Services measurements.
Paying recommended awards in two stages allows a government to claim that it is implementing the awards in full, while in fact not doing so. This government has not staged awards since 1998 but the previous Conservative government did so regularly through the 1990s.
For the past two years the government has been seeking to exercise more control over public sector pay rises, in part to offset the impact and cost of pay modernisation. The pay gateway is likely to mean a tighter regime of low increases. The government will hope that all other public sector groups will see the review body increases as a precedent or benchmark for increases through 2006.
The pay committee will assess specific proposals for pay increases and changes in pay structures against the government's pay objectives, and recommend to ministers whether they should be approved. It will assess departments' pay and workforce strategies and report to chief secretary to the Treasury Des Browne. The overall aim is that 'all significant pay decisions should be signed off' by the committee.
This tighter policy comes as pay modernisation continues to roll out across the public sector. The annual research report published by Incomes Data Services, Pay in the public services 2006, examines how this is happening in local and central government, the NHS and education. The report argues that the cost of modernisation has added to pay bill pressures but that most of these changes were planned and so should have been budgeted for. After all, the new pay system in the NHS – Agenda for Change – took six years to develop, negotiate and implement.
In the past few years, average earnings growth in the public sector has been slightly higher than in the private sector. This has been a reflection of extra payments for recruitment and retention, and pay modernisation coming into effect. Most of the extra costs are understandable rather than unplanned wage drift. And, in any case, the status quo of unequal pay structures could not continue, as shown by the recent huge sums in back pay awards being made by councils in the Northeast of England over historic equal pay differences.
It should be noted that the pay reform programme now coming through in the public sector is the biggest for more than a generation. People cannot be in favour of pay reform then throw up their hands in horror when this leads to higher pay growth.
The key elements of the modernisation process are:
delivering equal pay for work of equal value; aiding skilled staff to stay in the front line; and greater emphasis on knowledge and skills training. This has involved new pay developments including:
- simplified grading structures, based on job evaluation
- new, integrated bargaining structures
- national pay spines with local flexibility
- single status terms and conditions
- shortening pay scales to aid retention, and
- building new career structures.
The biggest pay reform of all has been Agenda for Change. All staff were expected to be assimilated to the new pay structure by December 2005, which was estimated to add something in the region of 5% to the NHS pay bill over 2004/06.
In schools, new career structures were put in place over 2003 to 2005. The upper pay spine was introduced to encourage more experienced teachers to stay in teaching and not be forced to seek careers in management to get higher pay.
Pay modernisation in higher education involves implementing the new national pay framework at local level. This introduces single status and single table bargaining and is designed to be equal pay proof. It is due to be implemented at each institution by August 2006.
In local government, single status agreements have been reached in around 40% of councils, but progress has been slow. The aim is that all councils will have overhauled their pay systems and introduced equal pay-proofed single status arrangements by March 31, 2007.
New pay systems cost money, whether in the private or the public sector. The large-scale nature of the current public sector pay reform was always expected to add to pay costs, but there is clearly a view in the centre of government that these costs are not being contained.
As a consequence, the government wants to reduce basic pay awards in the public sector to close to the Consumer Price Index inflation target of 2%. It wants lower average earnings growth and to rein in pay bill costs in the short and medium term. In the process, however, the new gateway might well slow down pay negotiations. It is likely to create a tension between the concept of delegated bargaining and central control over pay. Indeed, this tension could be exacerbated, given that the government's stated policy for more local pay flexibility runs counter to a widening of the vetting procedure for all significant pay decisions.
Any decision to vary the recommendations of the pay review bodies is likely to undermine their independent role. After all, the system was created to keep decisions on pay away from direct government control. All the interested parties give evidence to the review bodies – the government, the employers and the unions – which then make recommendations based on salary levels sufficient to recruit, retain and motivate, with affordability also part of the remit. Although one view in government was to freeze this year's NHS awards, the outturn reflects the degree to which it was thought unwise to undermine the review body recommendations.
Another view is that the government had already persuaded the review body to set very low increases, so only a little staging was required.
Governments in the past have often wanted to curb pay growth in the public sector through taking centralised control over pay decisions. In the 1970s, this was done through an incomes policy – which was much more strictly adhered to in the public sector than the private sector. In 1993, the Conservative government imposed a strict limit of 1.5% on all public sector increases.
This was the prelude to a period from 1993 to 1998 when all public sector pay rises were meant to be self-funding and employment was reduced significantly. Since that 'stop' period we have had an expansionary policy, both in terms of employment and pay from 1999 to 2004/05, but the government is now signalling that that period is over.
It remains to be seen how strict the new pay gateway committee will be, how far it challenges the independence of the review bodies, and what pressure it exerts on collective bargaining across the whole of the public sector. Its purpose is clear: to lower expectations and to keep increases to the chancellor's target of an average of 2.25%. So far, it seems to be succeeding.
Alastair Hatchett is the head of pay and HR services at Incomes Data Services
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