Pensions have become a key battleground between government and public sector workers. Ian Mulheirn puts forward the case for a pay and pensions body to depoliticise the issue
Public sector workers are angry. Government plans to make them work longer and contribute more for less generous pensions led to strike action by teachers and others at the end of June. And the shouting match continues.
Both sides have a case, but this trial of political and economic strength is an anachronism. What is needed is a more objective assessment of fair remuneration for public service workers.
From the tenor of the discussion, you might think that public servants have been living high on the hog for the past decade. In fact, relative pay in the public and private sectors has been largely unchanged since 1997.
As for public sector pensions, changes introduced over the past few years – some under the previous Labour government – mean that the existing settlement is affordable, despite initial government attempts to portray it as far too costly.
The reforms include: the shift to career average schemes for new civil servants in 2007; changes to contribution levels; and increases in the normal pension age. These have begun to reverse what would have been an inexorably rising proportion of gross domestic product going on pensions.
The coalition’s emergency Budget last summer went further to cut the cost by linking pension entitlements to the Consumer Prices Index rather than to the Retail Prices Index. Indeed, the recently published Fiscal sustainability report from the Office for Budget Responsibility showed public sector pensions as one of the few items of public spending set to decline substantially, from 2% to 1.4% of national output in the decades ahead.
Nevertheless, the government certainly has a case in its efforts to cut the cost of pensions further. It is very hard to compare the remuneration rates of different jobs across the public and private sectors. But it is possible to compare the pay rates of people with similar levels of qualifications, experience and other characteristics. The Institute for Fiscal Studies’ analysis of pay data from 2006 to 2009 shows that, excluding pension benefits, public sector men are paid about 2% more, and women 7% more, than their counterparts in the private sector.
Including the value of pension entitlements in the equation would probably make that remuneration gap bigger still. In a dynamic market economy, it’s not healthy or fair to have substantially divergent remuneration between the public and private sectors.
But the public-private gap is likely to narrow substantially over the coming years as the public sector pay freeze bites. With pension cuts too, strikers are concerned that, once lost, decent terms and conditions will not come back.
Ultimately, the result of the argument will be determined by unions’ abilities to get public sector workers behind the campaign, and by the amount of political capital the government is willing to risk to save public money. Given that what is at stake is the credibility of unions to their members and the government’s credibility in its deficit-cutting plans, it is hard to imagine that any reasonable debate will emerge.
But pensions and pay should not be set according to an arbitrary struggle between unions and governments. Instead, we need to establish an institution within which representatives of both sides can take the debate out of the public spotlight and anchor it in some objective analysis about fair levels of remuneration.
One of the most successful examples of such a body is the Low Pay Commission. With three commissioners drawn from unions, three from business and three academics, the LPC creates a forum for representatives of capital and labour to come to a reasoned compromise on a fair level for the minimum wage. Sure, there might be some metaphorical blood on the carpets but there’s no blood on the streets.
A public sector pay and pensions commission could work in a similar way. Taxpayers could be confident that their public services come at a fair price; while public sector workers could be assured that their pay will not lag behind that of their peers. Let’s take the politics out of pay and put some social science in.
Ian Mulheirn is the director of the Social Market Foundation
