Alastair Hatchett IDS Head of Pay and HR Services andKen Mulkearn Editor, IDS Pay Report

Capital Ambition pay seminar8 December 2010

Pay prospects in the public sector 2011/12

Private sector recession: public sector austerity?• There is an urban myth that all pay in the private

sector was frozen in 2009 and that many employees accepted pay cuts

• This view became widely accepted among politicians and media

• It became the basis of public policy with calls for pay freezes, first from Labour and then from the Conservatives

• The recession led to pay freezes, smaller City bonuses, short-time working in the car industry, loss of overtime and shift pay, unpaid leave and smaller variable bonuses

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Pay in 2009: a spectrum of experiencesSectors prone to freezes Sectors mostly

freeze-free

Cars and components Energy/utility companies

Engineering Finance

Road/air transport Rail transport

Construction Aerospace and defence

Bulk chemicals Pharmaceuticals

Media Retailing/supermarkets

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Pay trends from recession to recovery

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Current picture on pay awards

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Key observations from IDS pay research• Most private sector companies had a pay rise in each of

2009 and 2010

• Around 7% of companies had a double-year pay freeze

• Pay freezes were largely about retaining skills/staff for the upturn

• Earnings lower from smaller bonuses in all sectors

• Earnings lower from reduced hours of work, but basic pay tended to be protected

• Media generalised from short-time working in the car industry to suggest short-time and cuts almost universal in the private sector

• Pay cuts very rare (3% pay cut at Honda was temporary)

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2009 and 2010: a matched sample analysis

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Pay and earning: when is a freeze not a freeze?• Basic pay frozen, but bonus paid

• Basic pay rises, but bonus not paid

• Paybill frozen, but certain groups allowed market pay moves funded by staff turnover

• One company told IDS: pay review 0%, but off-cycle costs high

• Pay frozen above a threshold but flat-rate rises paid below the threshold eg BBC offers flat-rate £475 for those below £37,726pa

• Basic pay frozen, but progression pay continues

• The length of a freeze can be retrospectively shortened by backdating the next pay rise by 3 months eg BT in 2010

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Public sector pay developments : prior to Coalition• Increasingly tight Treasury limits 2.5 > 2 > 1.5 > 1 > 0%

• Long-term deals with below RPI rises (2.3/2.5%)

• End of comparability with private sector

• Changed remit to Review Bodies to stress affordability and CPI inflation target

• Arguments over progression pay in civil service and PRBs

• In 2009/10, review bodies constrained by 0 to 1%

• Media says public sector employees ‘feather bedded’ with ‘gold plated’ pensions

• Median public sector pay rise in 2009/10 2%, same as private sector

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Average Weekly Earnings by sector

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AWE whole economy: total pay and regular pay

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Jun-Aug 2010

Jun-Aug 2009

May-Jul 2010

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jun-Aug 2008 Sep-Nov 2008 Dec-Feb 2009 Mar-May 2009 Jun-Aug 2009 Sep-Nov 2009 Dec-Feb 2010 Mar-May 2010 Jun-Aug 2010

Per

cent

age

Total pay (including bonuses) Regular pay (excluding bonuses)

AWE for public and private sectors

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Aug 10

Jul 10

Aug 09

400

425

450

475

500

Aug-08

Nov-08

Feb-09

May-09

Aug-09

Nov-09

Feb-10

May-10

Aug-10

£ S

terl

ing

Public sector excluding financial services

Private sector

Total public sector

Economic forecasts for 2010/11• GDP to end 2010 at 1.7% and end 2011 at 1.8%

• RPI to end 2010 at 4.3% and end 2011 at 3.5%

• CPI to end 2010 at 3.0% and end 2011 at 2.6%

• Claimant unemployment 1.50m Q410, 1.64m Q411

• Average earnings: 2.3% end 2010, 2.5% end 2011

• Source: independent forecasts (Treasury, 17 November 2010)

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Retail Price Index vs Consumer Prices Index• Government promotes CPI as THE inflation measure

• Royal Statistical Society says ‘ CPI should not have sole star billing in this way’

• The CPI should have a housing element

• Reform of CPI required if it is to be used to uprate benefits

• Most EU countries have a domestic inflation measure (such as the RPI) and then publish CPI (HICP) as a secondary index

• RSS protest sent to UK Statistics Authority

• Bank of England tracks CPI but privately dislikes the index.

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Public sector pay in 2010• Labour freezes come into effect, prior to Coalition freezes

• Third stages of 3-year deals paid 2.25 to 2.55% (NHS, Teachers, police) also HMRC 1% and MOD 0% but 3.37% on paybill

• Freezes in Local government, doctors and dentists, SCS groups

• University employers offer 0.4% (Settled for 0.5% in 2009)

• Scottish Councils’ 3-yr deal: 0.65% from April 2010, then 2-yr freeze and no underpinning below £21K

• First groups negotiate on rises for £250 increases for those earning below £21,000:DWP offers £400 for AA grades, £465 in AO, and £540 for EOs

• NHS says intends to reduce reliance on agency staff

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Public sector pay in 2011• Main force of pay freeze policy to be in place

• Lots of variations in approach to rises for low paid, below £21K

• Variation in approach to whether progression to be paid

• Is it a paybill freeze or a 0% review increase, plus adjustments

• A return to market supplements?

• Will local government follow coalition policy and pay underpinning increases?

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Treatment of employees earning £21,000 or less• Should be based on basic salary

• Part-time workers with an FTE less than £21K should get pro rata increase

• £21K should not include O/T or London weighting or market premiums

• The size of the uplift should be determined by employers, to be of at least £250, bearing in mind

• The level of progression

• Affordability

• How best to avoid leapfrogging those earning just under £21K or those just over £21K by using a taper

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The Huttons• Will Hutton’s inquiry into Fair pay

• Would fixed ratios work

• 20 fold ratio on £14,000 = £280,000

• Would catch very few people

• John Hutton on public sector pensions

• Higher contributions and later retirement dates

• Career-average pensions?

• Hutton: ‘Public sector pensions not gold plated’

• Local government scheme funded, whereas other not

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Public sector pay in 2012• Pay still frozen?

• Pay reform promised for police and teachers

• Pay reform expected in civil service

• The future of independent pay review bodies

• Retention of national pay bargaining

• Gender pay gap widens

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How much will public servants’ standard of living fall back?• RPI inflation in 2010 4.5%

• RPI inflation in 2011 3.5%

• Pension contributions to rise by c.3%

• Pay freeze, but progression paid = 1%

• Pay freeze, but progression is frozen = 0%

• Pay rises of 2% or more for those earning below £21,000

• Meanwhile private sector pay set to rise by 3% in 2011 and 2012

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The gender pay gap: macro and micro changes• Gender pay gap narrows in April 2009 under impact of

lower male earnings: from lower City bonuses and lower manufacturing earnings

• Gender gap likely to widen in 2010 as male earnings bounce back from recession impact in Spring 2009

• Public sector pay freezes in 2010, 2011 and 2012 will hit women’s earnings as public sector employment around two-thirds women (around 80% in NHS, and 75% in teaching and local government)

• So gender pay gap likely to widen over next three years because of macro-economic and government policies

• Despite any micro level developments within companies

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