Many economists believe changes to public-sector pensions are essential – but unions are opposed
Whitehall officials are considering proposals to increase salaries for some public-sector workers in exchange for cutting their pension contributions.
It comes as experts call for a rethink of how civil servants and others working for the state, such as nurses, doctors and teachers, are paid.
Most trade unions are understood to be opposed to any change to the current rules, which make public-sector employees typically eligible for much higher pensions than private-sector workers while earning significantly less during their careers.
A change would be many years away and plans have not yet been presented to ministers. Spending more on salaries now, and less on pensions in the future, could also cause problems for the Treasury by pushing up short-term borrowing.
Cat Little, the senior civil servant in the Cabinet Office, has been leading discussions on the issue but no change is expected in the immediate future and ministers have not yet been presented with a concrete proposal.
However, in some parts of the public sector employers are already experimenting with ways of changing the balance of pay. United Learning, a large chain of state schools, was planning to offer teachers the option of taking a higher salary and lower pension, but was reported to have been blocked following opposition from the Department for Education.
The issue of pay has plagued governments in recent years, and returned to the agenda on Tuesday as the British Medical Association (BMA) voted to resume strikes by junior doctors who want an uplift of nearly 30 per cent following years of real-terms salary cuts for the profession.
Experts are pushing for the status quo to be upended, arguing that it is no longer fair or sustainable for the public sector to offer so-called “gold-plated” pensions, which have largely disappeared from private companies, while holding salaries down so that it is harder for state employees to get on the housing ladder when they are young.
Experts think it’s a ‘no-brainer’
“It’s a no-brainer,” economist Tim Leunig, formerly a long-serving civil servant, told The i Paper. “Firstly, because the state pension is going up so much people should be spending less on their own pensions – essentially, if you own your own home and are in a stable relationship, it is now quite hard to be poor in old age.
“Also, it makes it harder to buy a house. I worry that there are a whole load of public-sector workers who will be shut out of buying a house. Big pension contributions are getting in the way of putting down a deposit.”
Much of the public sector still offers “defined benefit” pension schemes, where retirees get a fixed payout each year that is based on their previous salary. The private sector has almost entirely switched to “defined contribution”, in which the amount each person receives depends on how much they have paid in and the subsequent investment performance of that money. At the same time, the salaries of public-sector workers have grown much more slowly than in the private sector.
The most radical option, which is considered highly unlikely by most experts, would be to switch pensions for state workers to a defined contribution basis. More plausible is a halfway house which would see an increase in public-sector base pay while the contributions made by employers towards pensions – typically between 20 and 30 per cent of salary, much more than in the private sector – are cut.
Laurence O’Brien of the Institute for Fiscal Studies, said: “The fact that we have seen lower growth in public-sector pay than private sector does open up the question of whether this is the best thing for the government to be doing. We think that given they [public-sector pensions] are so much more valuable than the private sector, there is a case that you could make them less generous and increase take-home pay, and this could improve recruitment in the public sector. That is what we think could be a sensible thing to try out.”
Alex Thomas, of the Institute for Government, added: “The generosity of pensions is out of whack with the lack of generosity of pay… If you give civil servants the option of rebalancing pay and pensions, that is something that we think is a good idea.” But he warned: “Whether it actually happens, I have my doubts.”
Duncan Brown, of the Institute for Employment Studies, said there was “always going to be an argument” for boosting pay in order to attract new staff, but added: “If you are struggling to recruit a maths teacher in Tower Hamlets, on a starting salary of £30,000, is pushing it up to £33,000 really going to make the difference?” He suggested that other tools could be more effective, such as retention bonuses for those who stay in their jobs.
Trade unions argue it would be ‘robbing Peter to pay Paul’
Multiple trade unions spoke out against any reforms to the overarching pay structures. Sampson Low, of Unison, said: “This looks like a bizarre case of robbing Peter to pay Paul. Low pay and recruitment problems in the public sector won’t be solved by offering to make people poorer in their retirement.”
Vishal Sharm, of the BMA, added: “While it may sound appealing to doctors at the beginning of their career to receive an upfront pay rise in exchange for a smaller pension in decades’ time, the knock-on impact on their lifetime earnings would be huge and would leave them worse off overall.”
And Andy Baxter from the Prison Officers’ Association said: “It should be clear to any employed person by now that changes to their pension scheme proposed by employers are rarely for the benefit of the employee. The main reason that employers are looking at this is to make savings through reducing pension contributions.”
Dave Penman, head of the FDA union which represents senior civil servants, was more supportive – saying: “Across the public sector, there is a real pay problem and this could be something that could potentially unlock it.”
But he was sceptical that action will be taken, pointing out that “they are not making progress on what should be really simple reform, let alone something as big as this”.
Raising salaries at the cost of future pension payments would on paper drive up government borrowing, potentially making it harder for Rachel Reeves to meet her fiscal targets. This is because the need to pay pensions over the decades to come is not recorded as a debt in the Treasury’s accounting rules. The fiscal rules are self-imposed, meaning they could in principle be changed, but any update would risk an adverse response from bond markets.
A Government spokesman said: “We are focused on supporting the Civil Service with the necessary tools it needs to deliver change for working people.”