Paying the price

1 Jul 10
We are told that private sector workers faced widespread pay freezes last year and now it's the turn of pampered public servants to feel the pain. But much of this argument is based on urban myths, while new salary curbs threaten fairness and equal pay, warns Alastair Hatchett
By Alastair Hatchett

01 July 2010

We are told that private sector workers faced widespread pay freezes last year and now it’s the turn of pampered public servants to feel the pain. But much of this argument is based on urban myths, while new salary curbs threaten fairness and equal pay

Last week’s Budget announcements on pay and pensions amount to a triple whammy for public sector employees.

Freezing public sector pay for two years – when inflation is 4%–5% and the VAT rise could push it up still further – is equivalent to a real-terms cut in earnings. This is mitigated by the £250 per year ­concession to those earning under £21,000, but not by much.

Net pay will be cut further if increased pension contributions are demanded, as seems likely. This will become clearer once the pensions review announced by the chancellor delivers its report.

In addition, if we assume that private sector earnings rise by 4%–5% a year by 2011, public sector pay levels will fall sharply behind them for the foreseeable future. This will not only re-introduce the public sector pay gap of previous ­economic cycles but also make it more dramatic in real terms.

Some think-tanks and commentators wanted the chancellor to go further still. The Social Market Foundation, for ­example, argued for a three-year pay freeze, which would have meant real-terms cuts in earnings of at least 10%.

Turning the public sector workforce into a scapegoat for the financial crisis has been under way for some time. False claims about people earning more than in the private sector – and about ‘gold-plated’ public sector pensions – have become widespread in the past year. Exaggerated claims about public sector pensions are designed to legitimise further pension reform – and the calls for pay to be frozen.

In reality, pensions for the majority of public servants are fairly modest, averaging between £4,000 in local government and £9,000 for teachers. Only the highest paid employees in the public sector, around 5% of the workforce, have substantial pension expectations and even those would be put in the shade by the ‘diamond-encrusted’ pensions of the type paid in the private sector.   

Ironically, pay freezes are now growing in the public sector just as they are fading in the private sector. Whereas they will apply across the board in the former, they affected just 20% of private sector employees in 2009 and 10% in 2010. Also, only a very small minority of pay freezes in the private sector lasted for more than one year.

An urban myth emerged last year that all pay in the private sector was frozen. It developed in the spring of 2009 as economists and the media misread the official earnings data, which showed headline figures for private sector earnings dropping into negative territory. This was almost entirely caused by a temporary collapse in bankers’ bonuses and temporary short-time working in the manufacturing industries, coupled with a range of companies adopting pay freezes to retain skilled

Elsewhere in the private sector, pay increases continued in 2009, with around two-thirds of firms giving rises and a median increase, monitored by Incomes Data Services, of 2%. Indeed, in the retail banking sector, in the spring of 2009, the average increase was 3.9%.

However, the mistaken belief that all pay was frozen, if not cut, in the private sector gained a mythical currency among many pundits and politicians. This fed the argument that after the private sector bearing the brunt of the downturn in 2009, it should be the public sector’s turn in 2010: a line repeated by the chancellor in last week’s Budget speech. This is despite the fact that over the whole of 2009 the median increase in pay settlements  – though not earnings – was 2% in both the public and private sectors.

The narrative of what happened in 2009 is important because this mythology about the private sector has become the basis of policy in the public sector. In reality, the recession hit some companies very hard but others less so – and some companies were not affected at all. There was a pay spectrum with freezes at one end and increases up to 4% at the other. Profit-sharing bonuses took a hit last year in many cases, particularly in financial services, but they remained positive in the retail sector (for example, at John Lewis, Tesco and Sainsbury).

In the summer and autumn of 2009, pay rises across the retail sector were largely of the order of 2%–2.5% in the top 30 companies.

By last autumn, both the Labour and Conservative parties were talking of pay freezes for the public sector, with Labour focusing on 2010 and the Tories on 2011. Now these policies have slid together and we face freezes from 2010 to 2012, and possibly beyond.

In the case of local government, there might be little movement on pay over a much longer period. The increase for April 2009 was just 1%, and for April 2010 the employers have not tabled an increase. For April 2011, the government’s policy is for a freeze again and small increases for the lower paid, but there are no guarantees.

Elsewhere, three-year deals agreed in 2008 have been honoured and allowed to run their course, meaning increases in 2010 of around 2%–2.5% in the NHS, schools and the police. These increases, it should be noted, are not out of line with current private sector awards.

The median settlement in the three months to April 2010 in the private sector is 2%. However, the median settlement in the public sector is 1%. Some 35% of the public sector awards that were renewed in April were pay freezes. These include the senior salary review body groups and GPs and dentists covered by the NHS doctors’ and dentists’ review body.

The move from recession to recovery started towards the end of 2009 and began to show in the average earnings figures quite rapidly. Figures published in June, relating to the three months to April, showed strong growth for earnings in manufacturing, at 5.8%. And earnings in finance and business services rose at an annual rate of 7.3%, boosted by the return of bankers’ bonuses. Overall, earnings grew by 4.5% in the private ­sector and by 2.5% in the public sector.    

The current higher level of retail price index inflation, 5.1% in the year to May, came after pay budgets were set for the first part of 2010. An IDS round-up of forecasts for RPI inflation suggest that it will run around the 4% level through much of the second half of 2010, when pay budgets in the private sector will be set for the key period of January to April 2011. With economic growth next year forecast to be around 2.5%–2.7%, we would anticipate private sector earnings growth of 4% at a time when public sector earnings might be closer to 1%.

The inquiry into fairness in public ­sector pay, chaired by Will Hutton of the Work Foundation, is expected to focus on ensuring top pay in the public sector is no more than a multiple of 20 times that of the lowest paid. In many organisations, the lowest salary is of the order of £13,000, not much higher than the national minimum wage, and a 20 times multiple would set an upper limit of £260,000 a year. Very few public servants earn more than this. A multiple of 15 would give a ceiling of £195,000. But, given the complexity of the organisations in which these executives are employed, any multiple might appear arbitrary. And in the context of a financial crisis created by bankers taking risks to secure bonuses worth millions of pounds, why is the focus on a couple of hundred executives in the public sector?  

The other Hutton inquiry – former ­Labour minister John Hutton’s review of public sector pensions – is widely expected to recommend increased employee contributions and reductions in benefits over the longer term.

A characteristic of private sector pay freezes in the first six months of 2009 was that they were negotiated with the workforce to save jobs and skills. As a consequence, unemployment stabilised earlier than expected at around 2.5 million. The new government’s public sector policy is to both freeze pay and cut jobs. The Chartered Institute of Personnel and Development forecasts that unemployment will now rise to 3 million over the next two years.

Under Labour, the Treasury put an increasingly tight squeeze on the pay review bodies to limit pay rises to 2%, then 1% and finally zero in 2010. This process has increasingly undermined the independence of the review bodies at a time when review body status was being considered for other groups such as the police. This process of overriding review body processes continues under the new government, setting the pay freeze agenda by diktat.

Impending pay reform has now been set back for however long the freeze lasts, from 2010 to 2012.  A new and long-negotiated deal was imminent in the prison service, but this would have needed pump-priming. A review of the role of social workers last year recommended higher salaries to reward experienced staff who stay on the front line. Is this process of reform also now frozen?

The public sector workforce is largely made up of women, who are primarily either low-paid part-time workers in local government and the NHS, or professional staff such as teachers, nurses, doctors and social workers. Women make up 77% of the NHS workforce and around 73% of the local government workforce. Around 87% of primary school teachers and 61% of secondary school teachers are women. Extended pay freezes in the public sector will widen the gender pay gap and contradict the coalition programme in ­support of equal pay and fairness.

So far the coalition has singled out two public sector groups for immediate attention – police officers and school teachers. The government says: ‘We will have a full review of the terms and conditions for police officer employment.’ Elsewhere it says: ‘We will reform the existing rigid national pay and conditions rules to give schools greater freedom to pay good teachers more and deal with poor ­performance.’

In the case of teachers, it is not clear whether the new government understands the substantial flexibilities that already exist for schools to vary pay, nor whether reform would be sought through the school teachers review body or via legislation or negotiation.

Despite the highly centralised decision to freeze pay, the new government is firmly in favour of ‘localism’, although it is not clear what this might mean in terms of pay reform. Former Conservative prime minister John Major’s administration adopted local pay bargaining in the NHS in 1992/93 and it ended in failure by 1997, as human resources departments in individual trusts agreed the same increases. It turned out that the assumed frustration with national pay and grading structures was a chimera rather than a reality.

In the early 1990s, the Treasury ­became a strong advocate of local pay bargaining. It then listened to some sound advice. In a guidance note in the autumn of 1993 it said: ‘At the extreme, local pay in theory could mean devolving pay… to local bodies. In practice, extremely devolved arrangements are not desirable. There are risks of workers being treated differently for no good reason. There could be dangers of leapfrogging and parts of the public sector competing against each other for the best staff.’
You can hear the penny dropping as the mandarin realises that paying ­people differently for doing like work, with no good reason, opens the door to the equal pay tribunal. And it was equal pay issues that led to the wholesale modernisation of public sector pay – with its emphasis on single status – that occupied so many of us through 2000 to 2005.   

Has anyone cautioned the new government about the long-term economic and industrial relations consequences of the course they appear to be set on?

Alastair Hatchett is head of pay and HR services at Incomes Data Services, an independent research organisation providing employment information and analysis

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