Research reveals extent of public sector pay growth

Published by Jon Land for 24dash.com in Central Government and also in Local Government

Workers in the public sector saw their pay grow more rapidly than those in the private sector during the first half of the decade, research showed today.

The earnings of people employed by the state grew by an average of 2.3% a year between 2001 and 2005, compared with growth of around 1.5% for those employed by private firms.

But workers in the public sector saw their pay increase at nearly twice the rate as their private sector counterparts once pension benefits were taken into account, according to the Institute for Fiscal Studies (IFS).

People who are employed in the public sector are far more likely to have access to generous final salary pension schemes than those in the private sector, where the majority of these schemes have been closed to new members, and in some cases to existing ones as well.

They are being replaced by less generous defined contribution schemes, under which the individual has to shoulder all of the risk of investment volatility and increased life expectancy.

The IFS said that while there had been little change in either the membership rate or the accrual rate of pension benefits among public sector workers during the period, there was a long-running decline in membership of final salary schemes in the public sector.

Once the different pension provisions were taken into account, public sector workers actually saw their pay and pension benefits rise by an average of 2.4% a year between 2001 and 2005, compared with a rise of only 1.3% a year among private sector workers.

But the research found that if the retirement age for public sector workers had been increased from 60 to 65 during the period, this would have reduced the generosity of their pension schemes to such an extent that both types of worker would have seen similar rises in their total remuneration package.

Gemma Tetlow, one of the authors of the research, said "Faster pay growth for public sector workers than private sector workers over the period from 2001 to 2005 was supplemented by the changing relative generosity of employer-provided pensions in the two sectors.

"More recently the Government has increased the age at which an unreduced public-service pension can be drawn from 60 to 65 for most new entrants.

"Had this increase been implemented between 2001 and 2005 for all members of these schemes, this would have significantly reduced the average value of these schemes and almost entirely offset the faster growth in public sector earnings relative to private sector earnings seen over this period."

Another report said the number of pay freezes in private firms was falling slightly, suggesting a "thaw" caused by higher inflation and a recovery in output.

A study of almost 100 deals by pay analysts IDS also found that public sector awards so far this year were "significantly lower" than those in private companies.

Average settlements were worth 1.8% in the three months to February, slightly down on the 1.9% for the quarter to January, while the proportion of wage freezes fell from 37% of all deals to 34%.

Ken Mulkearn, of IDS, said: "The distribution of settlements in the private sector remains bi-modal rather than normal, with twin peaks at 0% and in the 2% to 2.99% range. However the proportion of freezes looks like it may be falling, though there are clear differences between manufacturing and services.

"The likely influences here are a recovery in manufacturing output, with short-time working winding down, and higher inflation.

"Looking further ahead, private sector awards look set to outpace those in the public sector, though much depends on the pace of economic recovery. We can already see the impact of the Government's pay squeeze on public sector settlements."

TUC general secretary Brendan Barber said: "The fall in private sector pay freezes and increase in settlements over 2% suggests that the wage restraint of the last 18 months is thawing, with business and unions finding more room for pay rises.

"Struggling firms many need further wage freezes to stay afloat but, with inflation set to average between 2.5% and 3%, the vast majority of workers should expect a decent pay rise."

Dave Prentis, general secretary of Unison, said: "These outdated and selective figures fail to show the bigger pay and pensions picture.

"Back in 2001, as the IFS itself has demonstrated in other reports, public sector workers' pay had fallen well below that in the private sector and many hospitals, councils and schools were facing serious recruitment and retention difficulties.

"Throughout the 1990s, average pay increases were lower in the public sector than the private sector and even in just the four years previously, from 1997 to 2001, the gap had widened by a further 7%.

"The statistics show that pay did improve for a period between 2001 and 2005 - which the IFS itself has described as 'a period of catch-up' - but then started to fall back again in relative terms and, sadly, today public sector workers again face job losses, cuts and pay freezes."

Shadow work and pensions secretary Theresa May said: "Thirteen years of Labour has done untold damage to what was one of the strongest private pensions systems in Europe.

"Gordon Brown's pensions tax raid has undermined savings and allowed a growing divide to develop between public and private pensions."