Public sector pay and pensions

1. Public sector pay and pensions Antoine Bozio and Paul Johnson Institute for Fiscal Studies

2. A topical issue • Public sector pay amounts to £161 billion • The Government has decided to slow public sector pay growth • It claims that to do so is important in controlling inflation • It has “staged” recommendations by independent Pay Review Bodies for nurses and police

3. More police on the streets… Source: BBC

4. Outline • Public sector pay trends • Public sector pay levels • Public sector pensions • Pay review bodies • Inflation and public pay

5. General Government’s pay bill

6. Noticeable increase since 1999

7. Public sector bill since 1997 • Increase in pay bill from 11.5% to 12.4% of national income in 1997-2006 • Increase in the size of the workforce: +13% From 5.1 million to 5.8 million public sector workers +28% in NHS +24% in education +20% in the police

8. Pay trends since 1997

9. Pay trends since 1997

10. Pay trends since 1997

11. A diverse experience Public average= 47%

12. Public sector pay levels • Remuneration should be able to attract and retain workers in the public sector • Recruitment problems experienced in 2000-2001 • No evidence of similar issues now

13. Vacancy rate of teachers in England and Wales

14. Public sector pay levels • Limited evidence of the need for catch-up pay increases • No reasons to want a return to the 2000 situation • Specific issues remain unresolved • Regional issues • Public pensions

15. Regional differences

16. Regional differences

17. Vacancy rate of teachers

18. Public sector pensions • Public sector pensions have been a big issue in recent years • Pay and pensions should be considered as a whole in the remuneration package of public sector workers • Need to analyse both elements to compare public and private remunerations

19. Public sector pensions • More generous pensions in the public sector • Membership: 76% in “final salary” schemes in the public against 17 % in the private sector. • Value: public pensions worth 25% of annual salary against 20% in the private sector • To compare public and private sector wages one needs to add 12% to public sector wages • Public/private differential has been growing • Dramatic reduction in private sector coverage

20. Public pension liabilities

21. Public pension liabilities

22. Why increased liabilities? • Technical change (discount rates) • Life expectancy has been underestimated • Increases in public pay higher than assumed • Increases in the number of public sector workers • Despite recent pension reforms (increase in normal age for new members)

23. Pay Review Body process • Independent bodies make recommendations for 40% of the public sector • Some groups do not have the right to strike (police, army, prison officers) • Other groups (teachers and nurses) are very politically sensitive • Government makes the ultimate decision

24. 1.9% public sector pay growth to limit inflation • The Government argues that lower public pay growth is needed to control inflation “The Government has demonstrated its commitment to [the credibility of UK’s monetary policy] by delivering overall headline awards for Pay Review Body groups in 2007-08 that average 1.9%. […] it is therefore important that public sector pay settlements continue to be consistent with the achievement of the Government’s inflation target of 2 per cent”

25. “Staging” but not saving much • The Government has “staged” pay awards for nurses and the police • Staging represents a small one-off savings • Police, nurses and prison officers: +1.9% • Scottish and Welsh police and Scottish nurses: +2.5% • Armed Forces: +3.3% • Average weighted increase: +2.24% • Excluding Wales, Scotland and teachers: +2.08% • Contrast with the long-term cost of public sector pensions

26. Inflation and public sector pay • Mervyn King’s 1998 speech on “Inflation and labour market”: “[We don’t] think earnings growth causes inflation – inflation is a monetary phenomenon. Rather it is because sustained earnings growth much above or below these rates [4%] may indicate that the level of utilisation in the labour market has reached a level inconsistent with the inflation target.”

27. Public pay increase consistent with inflation • 2% inflation target does not necessarily imply 2% pay increase. • With 2% productivity growth, 4% average earnings is consistent with the inflation target Ed Balls when awarding 2.45% to teachers in 2008-09: “What the Prime Minister said was that going forward public sector pay increases must be consistent with keeping inflation at 2%. […] He didn’t say public sector pay would have to be 2%.”

28. Impact of pay drift • Need to account for the difference between earnings growth and headline increases • “pay drift” occurs when average pay would increase even with a 0% award • Not to be confused with incremental pay scale • Department’s estimates have been very unreliable • These imply headline increases consistent with inflation target are above 1.9% • 3.8% for teachers • 2.4% for nurses • Need more for better and more transparent estimates

29. Conclusions • Since 1999 public sector pay has been catching up with private sector earnings • Government says it wants to limit pay growth in the public sector to control inflation • No evidence that PRB recommendations were close to being inflationary • There are arguments for greater variation in regional pay awards

30. Conclusions • Trade-off when remunerating public sector workers between pay and pensions • No strong argument for favouring pensions over pay • Government should refocus its cost cutting energy towards public sector pensions • Data on public pay, estimation of pay drift or computations of pension liabilities deficient