Chelmsford TUC

TUC & Trade Unions

Defending Public Services: A Briefing for Trade Unionists

Trade unionists have always had an interest in defending public services. Here are a number of papers that were delivered to a conference at Congress House in 2010 on the theme "Campaigning to Speak up for 
Public Services".

The conference examined the causes of the economic crisis; the response of the mainstream political parties – particularly with reference to their public expenditure plans – and the trade union movement to it.

Those that attended the meeting explored the potential for joint campaigning activity within the region in defence of services and jobs, living standards; and the scope for building solidarity at local and regional level especially when union members are compelled to take industrial action to defend services and jobs. The message behind the speeches remain the same.

Exploding Public Sector Pensions Myths: A Briefing for Trade Union Members

Headlines about public sector pensions seem to have been appearing on a daily basis ever since the credit crunch started to bite. Attacks on pensions have been made by the Conservative Party, the Liberal Democrats and the CBI, alongside various newspaper and internet commentators.

These attacks say that public sector workers are unfairly rewarded and benefiting from “gold plated” pay and pensions. They rightly identify a growing gap between public and private sector pensions caused by the employer retreat from decent pensions in the private sector, but wrongly conclude that the answer is to level down public sector pensions. They say that public sector workers should “share the pain” and that public sector pensions should be cut to the level of the private sector. Unions defend public sector pensions but not as a special case. We want to see everyone at work able to look forward to a decent pension when they retire.

The Attacks

"My vision over time is to move increasingly towards defined-contribution rather than final-salary schemes" for employees in the public sector. “We have got to end the apartheid in pensions." David Cameron

"Taxpayers who are struggling to build their own personal pension will be lumbered for decades by the cost of covering public sector workers who retire years earlier on risk-free pensions.” CBI

“It is unfair for businesses and families struggling in the downturn to pay higher taxes to fund pensions that they cannot afford for themselves or their employees.” Institute of Directors

Spending on public sector pensions is “completely out of control”. Vince Cable, Treasury spokesman for the Liberal Democrats

“Gold-plated public sector pensions...are unjust, unsustainable and unfair to ordinary people, many of whom have had to postpone their own retirement or seen their private pensions reduced to nothing.” Taxpayers’ Alliance (1)

(1) The Taxpayers’ Alliance is a pressure group that campaigns against tax and public spending. Many of its staff and founders appear to be current or former Conservative Party members.

MYTHS AND FACTS

MYTH 1 The cost of public sector pensions is spiralling out of control.

REALITY Costs are set to increase somewhat (as are all pensions costs), but not by an unsustainable amount.

What are the Facts?

Many attacks on public sector pensions give a huge number for the cost of future liabilities. But they rarely explain what this means.

Public sector pension liabilities go a long way into the future. Young people at work today building up a public sector pension could well live for another eighty years. If you estimate the costs of all public sector pensions for decades into the future and then present it as a bill that has to be paid immediately, then it is hardly surprising that you end up with a frighteningly big number.

For example an organisation called the British North America Committee got headlines recently for saying that the cost of public sector pensions was 85% of GDP (the total wealth produced by the country each year). Their press release said:

"Public sector pension liabilities are £1,177 billion, about £20,000 for every person in the UK, equivalent to 85% of GDP"

But these figures do not mean very much. This is just another attempt to work out the total cost of public sector pensions going for decades into the future and expressing it as if it all had to be paid in one go, rather than over the decades the pensions are in payment.

This is what David Lipsey, the chairman of Straight Statistics – a pressure group that campaigns against the misuse of statistics – said about this report:

"The innocent might think that this means 85 per cent of our GDP in future is going to go to support those getting public sector pensions, leaving just 15 per cent for the rest of us. This is plain rubbish.

"The liability to pay public sector pensions is stretched over many, many years – from now until the last existing public sector employees dies. It is a statistical howler that would make an “O” level student blush to compare this with the figure for GDP for a single year. To make matters worse, we can safely expect GDP to increase over the years to come (if it does not, neither will pensions, reducing the actual liability). So the proportion of present GDP represented by the liabilities is even less relevant. What matters, if anything, is the proportion of future GDP that they represent."

The Treasury does indeed produce estimates of the cost of paying public sector pensions as a proportion of GDP (not taking into account contributions). They show an increase from 1.5% of GDP to 2% by 2027-28. After this projections show a slight decline in the proportion of GDP taken up by public sector pensions. It is not surprising that there is some cost increase in the next few decades as we live in an ageing society. Either the cost of pensions will increase or many more pensioners will live in poverty. But public sector pensions take up a much smaller share of GDP than state pensions and long term care – also both set to increase in the face of longer lives.

The second claim made is that the cost of public service pensions is “out of control”. This is not the case. Not only is the share of public sector pensions in the country’s wealth less than 2% of GDP every year in the Treasury’s projections, the changes negotiated in many unfunded schemes caps employer costs with employees picking up the bill if people live longer than expected and pension costs rise more than expected.

Another way of looking at the cost of pensions is known as the “net public service pensions” net public service pension cost. It is the difference between benefits paid out to today’s pensioners from unfunded schemes and current contributions paid by current staff. In the current financial year this is estimated to be £4.1 billion or about 0.3% of GDP.

This is eminently affordable, but the figure can change a lot from year to year. This is not because of bad planning or anything being "out of control" – simply because it is the difference between two much bigger numbers that are not linked to each in the short term. These big numbers are:

  • the costs of pensions paid out each year – and pension levels are linked to the cost of living; and
  • the total contributions paid by staff and employers in the public sector, which is linked to the numbers of staff and the year’s pay settlement. Over time earnings tend to go up more than prices so this will tend to reduce the net cost of pensions. But there can be sharp variations from year to year – particularly as pay in the public sector is often held back by politicians and then catches up once the damage done to recruitment and retention needs to be mended.

In 2009/10, for example, the increase in the cost of benefits will be determined largely by the 5% increase in the cost of living (RPI) in September 2008. But the increase in contribution income will be determined largely by the size of pay increases in the public sector during 2009/10. So when politicians freeze or hold public sector pay below inflation it has the odd effect of appearing to make pensions more expensive, even though those extra costs are more than met by reduced expenditure on the wider wage bill.

Of course other factors will also affect the cost of pensions. For example, how many people retire each year and how long pensioners live will affect the cost of pensions and the number of current staff and what grades they are on will determine the income figures. But these change relatively slowly over time and don’t produce the big changes between years that critics seize on.

Pension Reforms

The Government and trade unions have negotiated various reforms to public sector schemes in recent years. The reforms were made mostly in response to higher demands from increased life expectancy, with schemes now sharing the risk of members living longer.

Most public sector pension schemes have increased the normal pension age from 60 to 65 for new entrants, in line with most private sector schemes. Only the armed forces, police and fire schemes have kept theirs below 65, reflecting the physical demands of these jobs.

Nurses, teachers and local government employees are now paying more on average towards their pensions than before the reforms. This agreement resulted in an initial increase in member contributions of 0.5% on average with possible further rises when valuations take place every 3 or 4 years. New cost-sharing arrangements were put in place that mean that if higher pension benefits are paid or if life expectancy continues to rise more quickly than expected, the resulting cost will fall mainly on public sector scheme members rather than on the taxpayer.

The Pension Policy Institute (2) has estimated the reforms have reduced the immediate cost of benefits by 12.5% and the Government expects the reforms to result in savings of around £13bn on the NHS, teachers’ and civil service schemes, spread over a 50-year period.

MYTH 2.

Savings could be made by replacing final salary (defined benefits) schemes by a defined contribution scheme

REALITY.

Scrapping defined benefit pensions would mean increased public spending on public sector pensions in the short and medium term What are the Facts?

David Cameron has proposed replacing defined benefit schemes with defined contribution schemes in order to save costs. In defined contribution (DC) schemes (also known as money purchase schemes) the pension payment depends on the value of the investment in the individual’s pension pot upon retirement. Most public sector pensions are final salary schemes (also known as defined benefits schemes) which guarantee a pension based on the number of years worked for the organisation and the final salary upon leaving.

If new or existing staff were switched to DC schemes, then spending on pensions would increase. This is because most of the cost of paying pensions at any time is covered by using the contributions paid by or on behalf of current employees. If those contributions are instead paid into members’ own DC pots then they could not be used to pay for the pensions of already retired public employees.

In other words tax payers would be paying at the same time for the pensions of those who have already retired and to build up funds to pay pensions in the future for staff currently working – a double whammy.

If the quality of public sector pensions is substantially reduced this could also lead to many retired public employees becoming reliant on means tested benefits. This is because many public sector employees are low paid workers, already on quite low pensions. Increased spending on means test benefits would offset some of any saving on pension contributions in the longer term.

(2) Pension Policy Institute (2008) An assessment of the Government’s reforms to public sector pensions

Public Sector Pensions – Definitions

Defined Benefit and Defined Contribution Schemes

A Defined Benefit (DB) scheme (also known as a Final Salary scheme) offers a defined or predetermined level of pension benefit. The benefits are expressed as a fraction of the final salary for every complete year worked for the organisation or as a scheme member of the final salary pension. In a Defined Contribution (DC) scheme (also known as a Money Purchase Scheme), a pension fund is built up using employee and employer contributions. The pension available at retirement depends on the level of contribution paid, investment returns earned over time and the cost of purchasing the pension at retirement. These things are not known in advance. Therefore the pension it produces cannot be known. The contribution is defined, but not the pension.

Public Sector Pensions – Definitions Funded and Unfunded Schemes

The terms funded and unfunded do not relate in any way to the contributions made by employees. Public sector scheme members contribute between 3.5% and 11% of their salary annually to their own pensions. The Local Government Pension Scheme and the Universities Superannuation Scheme are ‘funded’ schemes, in which the funds required to pay future pensions are built up over time. This separate fund allows resources to be planned and managed over time to meet pension liabilities, as occurs with private sector DB schemes. There are around 4.25 million active, deferred and pensioner members of public sector funded schemes

Other public sector schemes such as those for civil servants, health workers, teachers, firefighters and uniformed police officers are ‘unfunded.’ Current pensions for staff are paid directly from central government’s current revenue (made up of contributions paid by civil servants, teachers, fire fighters and uniformed police officers in employment, and their employers). There are over 5.5 million active, deferred and pensioner members of unfunded schemes.

The significance of the difference between funded and unfunded schemes is often misunderstood or misinterpreted. Contributions are calculated and paid in unfunded schemes in much the same way as in funded schemes. The main difference between the two is that while unfunded schemes, in effect, lend contributions directly to the Government and receive a designated rate of interest in return, funded schemes keep control of their contributions and invest them in a range of assets.

When benefits are paid by the unfunded schemes, it is portrayed as public expenditure. In reality it is largely repayment by the Government to schemes of the invested contributions with the money being passed on as benefits to scheme members. Deficits (and surpluses) are identified at scheme valuations in both funded and unfunded schemes and addressed in the same way by adjustment of contributions and/or benefits.

MYTH 3.

The discrepancy between private and public sector pensions needs to be tackled by punishing the public sector.

REALITY. We should level up pensions – not level them down

What are the Facts?

Many justify attacks on public sector pensions by the decline in the number and quality of private sector defined benefit pension schemes.

Around 85% of public sector employees are members of an employer-sponsored pension scheme, most of whom have a Defined Benefit scheme. However, in the private sector 40% of employees are members of an employer-sponsored pension scheme but only 15% of employees are active members of a Defined Benefit scheme.

Private sector employees have been hit hard by the employer retreat from good pensions. But this does not justify punishing public sector workers. Two wrongs do not make a right.

Public sector pensions support lower-paid members of the workforce. Well-paid private sector employees are likely to get a decent pension on top of their pay. The real difference between public and private sectors is among the low and average paid. The attack on public sector pensions may be wrapped up in rhetoric about fat-cat public servants, but it is really an attack on the low paid in the public sector. Only 20% of private sector employees who earn between £100 and £200 a week are members of an employer-sponsored pension scheme whereas 70% of public sector employees in the same pay range are pension scheme members.

The recent economic turmoil has had a huge impact on private sector DB and DC schemes. Savers in DC schemes have seen the value of pension pots plummet, while the private employer sponsors of DB schemes now have to make up the deficits. Unfunded public sector schemes have not been hit by market turbulence. Tax payers have not suddenly had to find funds to make up scheme deficits, and government can plan for the future funding of public sector pensions.

Private sector schemes need to be funded because there can be no guarantee that the sponsoring employer will still be around when staff retire. Public sector employers, ie the state, will exist in perpetuity and, as in other countries such as the USA, we tend to have unfunded pensions for central government functions such as health and the armed forces but funded schemes in local government.

To protect future pensions, private sector schemes (and funded public sector schemes) are regulated to ensure they have sufficient funds to meet their future commitments. But this tends to be on a cautious basis and deal with stock market volatility thus pushing up private sector pension costs. Funded public sector schemes can plot a more stable long term course. All schemes have to deal with issues such as increased life expectancy. The public sector has done this with the cost-sharing agreements backed up with a ceiling on employer costs described above. As public sector schemes operate on a sustainable basis and employer contributions are capped, there is no financial justification to reduce benefit levels simply because employers have savaged private sector schemes.

Just how generous are public sector pensions?

Five million employees working in the public sector qualify for pensions, including 1.3m in NHS, 1.6m in local government, 600,000 teachers, 600,000 civil servants, 200,000 in the armed forces, 150,000 police officers and 50,000 firefighters.

The mean average public sector pension is £7,000 but the majority of public sector pensioners have pensions of less than £5,000. The value of the main schemes in the public sector for new entrants are similar to a medium private sector final salary, at around 21% to 24% of salary on average.

MYTH 4.

Most public sector workers retire at 60 on two thirds of their final salary

REALITY.

The majority of workers joining public sector pension schemes will retire and claim their pension at the age of 65.

What are the Facts?

Many reports about pensions would lead you to believe that most public sector workers retire at the age of 60 on two-thirds salary, but in fact this only applies to the very few people who work in public service for forty years or more. The pension age for many public sector workers has always been 65 and this now applies to most new joiners.

The average pension in Local Government is around just £4,000 per year, and just £2,000 for women while in the Civil Service the average is £6,500. The average pension for a female NHS worker is £5,000 but the median pension for women is much less. In fact half of all women pensioners who have worked in the NHS get a pension of less than £3,500 per year.

MYTH 5.

It is unfair that public sector workers benefit from “gold plated” pensions

REALITY.

The private sector is the real culprit for unfairness

What are the Facts?

The real inequality exists in the private sector, where highly paid executives receive the real gold-plated pensions. The TUC’s 2008 Pensions Watch study of 346 directors from 102 of the UK’s top companies found that they are set to earn a yearly pension of £201,7003.(3) This is 25 times the average workplace pension that ordinary workers receive (£8,100). The study also revealed that the most senior directors of these firms had average pension funds of £5.2m, with an annual pension forecast of £333,400. In reality, most directors of the UKs largest private sector companies can look forward to retiring on a full pension at age 60, accrued on generous terms in a final salary scheme.

(3) www.tuc.org.uk/extras/pensionswatch2008.pdf

Myth 6.

The Private Sector props up the Public Sector

REALITY.

The UK economy depends on a thriving public sector as well as private sector

What are the Facts?

It is not a one-way street, but a complex relationship. Public sector workers and employers pay for the vast majority of pensions in payment through contributions. But without an effective public sector, the private sector would be far less productive. It directly benefits from the public sector through transport and information infrastructure and an educated workforce, whose social, health and welfare needs are attended to by the public sector. Third, it is also true that all workers pay for everyone’s retirement income in one way or another. Private sector pensions are paid for through the price of goods and services, much like tax levels include the cost of public sector pension provision.

In short, the private sector could not function without the public sector and vice versa. The public sector contributes significantly to GDP and it is entirely unfair to suggest that the public sector is any way a drain on the private sector.

Public sector pension schemes also play an important economic role in other ways. For example, funded public pension funds provide billions of pounds worth of investment in the UK economy. Pensions are also an important element of the remuneration package and an essential recruitment and retention tool to attract people to deliver our vital public services. In addition, they play an important role in ensuring individuals have a reasonable income in retirement. They are an effective way of encouraging saving for retirement among a large part of the workforce, at a time of great turbulence and uncertainty.

Conclusion

The recent attacks on public sector pensions have used the economic crisis as excuse to attack pensions. The key issue about pensions should be ensuring every worker has access to a decent pension scheme; about levelling up not down. Public sector pension schemes are good quality and this should be applauded. The UK need good pensions for all, not lower pensions and poverty in old age for all. Society depends on public services, delivered by public servants who deserve decent pay and pensions.

Exploding privatisation myths

Summary

While the recession places increased demand on local public services, they are also under mounting pressure to make savings and become more efficient. One suggestion often put forward to tackle the country’s growing debt problem is to outsource or privatise our public services. This pamphlet examines this proposition and attempts to explode some of the myths and misconceptions about privatisation to show that it would cause more problems than solutions.

MYTH 1

During the economic downturn, the best way to save money is to privatise public services In reality, public money is best kept within the public sector during the downturn. For every pound of public spending in a local area, this generates an additional 64p. Outsourcing and Public Private Partnerships – often undertaken with large multinational companies – take money out of areas when local economies and communities most need to be supported. Public spending has a stabilising effect, particularly during a recession; privatisation would only undermine this.

MYTH 2

The private sector costs less than the public sector and is more efficient.

In reality, there is no evidence that the private sector is more efficient than the public sector.

Outsourced services are concentrated in a few large firms which dominate the industry and have proved able to earn large profits. PFI projects often go far over budget while contracts are inflexible, binding the public sector into contracts for buildings and services which often later prove unfit for purpose. PPPs and outsourcing are too often the cause of a downward pressure on staff terms and conditions, the fragmentation of services and a divisive effect on public sector ethos.

MYTH 3

Competition is the best way to improve public services

In reality, public services are too important to compete on price. Public services reduce inequality, promote economic, social, and environmental security. Competition merely leads to a race to the bottom, with providers racing to compete on costs to the detriment of service quality. Competition leads to the fragmentation of services and increased transaction costs, linked to making and monitoring contracts, accounting, auditing, legal services, advertising and shareholders’ profits.

MYTH 4

The private sector is more responsive to service users’ individual needs.

In reality, only the public sector can respond to society’s collective needs. Public services must be subject to democratic accountability and transparency. Privatisation erodes this accountability and treats vital services merely as contracts to be bundled up and sold off.

Myth 5

The public sector has a worse productivity record than the private sector.

In reality, public services create public value – but this is hard to measure. It is notoriously difficult to measure public sector productivity and even harder to compare it to the private sector. An increased class size might appear to show a teacher working more productively, but it is doubtful this would improve the quality of education. Private sector productivity can be assessed by looking at the balance sheet. In the public sector, it is more about public value, with services that respond to the needs of citizens, that are sustainable, provide long-term value for money and are trusted by citizens.

Myth 6

“Back-office” functions can be outsourced without impacting on the front-line

In reality, support functions are just as important as the front-line. Without “back office function”, frontline workers would not be able to do their job. The NHS would not be able to survive without the people who book appointments, analyse blood tests, process X-rays or make sure staff get their wages on time. A false division is being created between front-line and support services which is fragmenting and damaging vital public services.

The recession has placed unprecedented strain on local public services and economies. Public services are facing increasing demand, yet are under mounting pressure to make savings and become more efficient. One suggestion often put forward to tackle the country’s growing debt problem is to outsource or privatise our public services. This pamphlet examines this proposition and attempts to explode some of the myths and misconceptions about privatisation to show that it would cause more problems than solutions.

There is a strong economic and social case for public services, both in a recession and during recovery, in maintaining and creating employment, boosting skills and promoting health and wellbeing. Public services help promote economic competitiveness as well as social inclusion, yet these arguments are being lost in the race to find ways to cut spending and services.

The Push to Privatisation

‘Gordon Brown has announced a £16bn sale of government assets in an effort to reduce the growing budget deficit. The Dartford crossing, the cross-Channel rail link and the nationalised bookmaker the Tote will be among items going on sale over the next two years.’ BBC News 12 October 2009

Public sector organisations with more than 1,000 employees ‘should conduct a systematic review of their functions, systems and processes to drive simplifications and standardisation. They should lead to significantly greater sharing of services and potentially increased outsourcing.’ Treasury Operational Efficiency Programme 2009

“The power of competition and the opening up of the NHS to new providers will bring innovation and investment. And the power of choice will lead to better quality care.” David Cameron, 20 April 2009

“Charities, private companies and parents’ groups will also be allowed to set up schools – competing with existing primaries and secondaries for local children – and in time, though this is not yet Tory policy, to do so for a profit.” David Cameron, 6 February 2009

‘Non-core activities are best provided by the private and third sectors unless it is essential for them to be providedin-house.’ CBI,DoingmorewithLess

What do we mean by privatisation?

Privatisation is a broad term that covers several concepts

  • Full privatisation. The handing of control and/or ownership of public services to the private sector .
  • Public-private partnerships (PPPs) refer to collaborative relationships between public bodies and private companies, including PFI.
  • Private Finance Initiative (PFI) partnerships. Method of providing new public buildings and projects such as schools, hospitals, roads and homes by using private sector money up front that is later repaid with interest by the state. A private sector consortium designs, builds, finances the project - and then operates it for a period of at least 25 years. The consortium’s fees are paid from public money, with an element of that fee dependent on it meeting performance standards throughout that period.
  • Outsourcing to private and not for profit organisations. Awarding a contract to a private, voluntary sector organisation to supply a service previously run by a public sector body such as a council or hospital.

Exploding privatisation myths

MYTH 1

During the economic downturn, the best way to save money is to privatise public services.

REALITY

During the downturn, public money is best kept within the public sector.

As the public sector faces pressure to squeeze spending, politicians, commentators and contractors have called for more public services to be transferred to the private and voluntary sectors in the belief that this would save money.

As recent global economic developments have severely questioned the credibility of free-market economics, it is surely time to reconsider the view that the private sector has all the answers. The push to transfer services and assets to the private sector is rarely done as a result of evidence-based policy, but driven more by political will. Indeed, a report by private insurers Zurich says that ‘government policy has moved from encouraging partnerships towards mandating them”. A more worrying development is the increasing influence the private sector has on decisions affecting public services. A spokesman from investment managers, Brewin Dolphin recently stated that outsourcing is now such a part of the political culture that there is little chance of the process being reversed. "Consultants and outsourcers are so entrenched in the system that they’re actually the ones sitting there and making the decisions for the government."(1)

It is also time to give full consideration to the role that public spending plays in local economies. A recent TUC Touchstone pamphlet highlighted research which shows that for every pound of public spending in a local area, this generates an additional 64p.2 Outsourcing and PPPs – often undertaken with large multinational companies – takes money out of areas at a time when local economies and communities most need to be supported. Public spending has a stabilising effect, particularly during a recession; privatisation and outsourcing would only undermine this.

MYTH 2

The private sector costs less than the public sector to deliver services and is more efficient

REALITY

There is no evidence to show that the private sector is more efficient than the public sector

In the pursuit to do ‘more for less’ the argument is often heard that the private sector can run services better than the public sector because it is more efficient and has better skilled managers.

It is also claimed that the profit motive is the greatest guarantee of efficiency. Yet, the fact that the private sector, unlike the public, must pay a dividend to its shareholders means that funds are always diverted into profits. And the private sector has certainly shown it can make a decent profit from the public purse.

The public service industry is a highly profitable market for the private sector with an annual turnover of nearly £80bn. Large companies such as Compass, Serco and Capita have made huge profits from the privatisation of public services and dominate the market. Local authorities account for a fifth of Capita’s business, which describes itself as “the UK’s leading outsourcing company”. Support services firm Serco, which runs prisons, railways, school inspections and London’s congestion charge recorded a 33% increase in pre-tax profit in the first half of 2009 to £83.4m.

(1) Moneyweek,Profitfromthefiscalcrisiswithoutsourcing, 4 September 2009 (2) TUC,SpeakingupforPublicServices, 2009

The report by insurers Zurich into outsourcing indeed warns against the risk of the outsourcing market consolidating and becoming dominated by a few large providers. It says: ‘Big is not always beautiful and can bring risks in itself ... Co-operation between authorities can in effect force a monolithic market place of suppliers that may give short-term gains but close down future opportunities to spread risk.’(3)

The text below highlights the particular case of the Private Finance Initiative (PFI). PFI contracts are notoriously inflexible, limiting the ability of public sector bodies to strategically plan for the future as they are contractually bound to pay for a building and a pattern of service provision which could later prove inappropriate and unfit for purpose. The rext below also explores one of the main arguments used to promote the PFI, that risk is supposedly transferred from the public to the private sector. Experience shows that governments remain accountable to deliver services regardless of how well the PFI project or company fares.

There is scant evidence of the private sector’s ability to provide more efficient services. Even the outsourcing industry acknowledges that the efficiency argument is an elusive one. Martyn Hart, chairman of the National Outsourcing Association recently expressed scepticism about the extent of the savings which could be made from outsourcing services, like cleaning.

Private Finance Initiative The total capital value of PFI and PPP schemes to date completed or signed is more than £100bn. The largest sector commitments are for transport schemes and hospitals and other health projects. As contractors typically operate on a 10% to 20% margin, this represents at least £10bn in profits alone for the construction companies. In addition professional fees – for legal services and accountancy/consultancy advice – generate substantial earnings for the firms.

Neath Port Talbot Hospital in Wales demonstrates the typical repayment set up of PFI deals, where loan repayment over 30 years (including maintenance) will exceed £445m compared with building costs totalling only £66m. Since such earlier experiences with PFI, the Welsh Assembly Government has taken a much more cautious approach to PFI than the UK Government and the initiative has been dropped in the NHS. In addition, 250 members of staff who provided cleaning and catering to the Neath Port Talbot PFI hospital were returned to NHS employment in 2009.

The Major Contractors Group (representing the biggest construction firms in the UK) estimated that at the height of the economic boom, PFI contractors were getting between three and 10 times the normal rate of construction industry profits. However, during the financial crisis, the risk was transferred back from PFI contractors to the taxpayer, with the government promising to bail them out with billions of taxpayers’ funds. In March 2009, a new Infrastructure Finance Unit was set up within the Treasury to ensure that PFI projects continued after the credit crunch and to lend directly to PFI projects instead of PFI consortium borrowing from banks. The infrastructure finance unit is expected to lend about £1bn-£2bn to PFI schemes in 2009-10, meaning that taxpayers’ money is being used by the government to subsidise the operation of many of the UK’s largest PFI schemes.

Stephen Glaister, professor of transport and infrastructure at Imperial College London commented that: "The financial crisis has highlighted a basic truth - that private finance is only a way to borrow money that will have to be repaid by the taxpayer sooner or later. Risk transfer has proved difficult or impossible, so the taxpayer has ended up bailing out the commercial failures of the PFI companies."(4)

He stated that: “If you’re cleaning a hospital, and if you’re doing it to the same standard and paying staff the same thing, then where are your economies of scale?...If you’re just outsourcing for cost savings there has to be somewhere where the cost savings can come.” He went on to suggest that small savings might be possible from bulk procurement of cleaning products, but said that there was a danger that companies would secure their profit margins by paying staff less.5 Since public services are highly labour intensive, this is the area that is usually squeezed to find savings, often leading to a downgrading of pay levels, holiday entitlements, sick pay, maternity pay, and training and development.

A study by the Office of Public Management (OPM) on outsourcing in the NHS found that “little hard evidence is available to suggest that outsourcing impacts positively on value for money or quality of care. Conversely there are several examples of outsourcing having a directly negative effect on the value for money and quality of care in services.”

The report from Zurich into outsourcing and PPPs found that outsourcing is often ‘the cause of a downward pressure on terms and conditions, fragmentation of services and a divisive effect on the ethos of the public sector and the NHS.’ But warns that ‘a very wide range indeed of disasters and embarrassments caused by supplier failure’ suggest that the risks of the push to outsourcing are ‘potentially catastrophic and urgent’.

The problems they highlight include:

  • Countless and huge examples of the loss of sensitive personal data and privacy responsibilities eg the £225 million Contact Point, child protection database issues;
  • Badly managed social care contracts leading to reputational damage and legal challenges;
  • The National Audit Office is investigating alleged overspending and overrun of IT contracts worth £18 billion; and
  • The failure or collapse of a number of shared service agreements

PRISONS

Private prisons are performing worse than publicly run prisons. Data obtained under the Freedom of Information Act by More4 News show that four of the 10 private prisons scored the second lowest rating of 2, “requiring development”, and only one above an assessment of “serious concern”.

There are also disparities in the number of complaints upheld in private and state-run prisons. Rye Hill Prison, a private prison run by G4 saw a total of 22 complaints, well above the average in both prison sectors.

The evidence contradicts the government’s claim that the greater use of private prisons has driven up standards. Despite this Serco has been awarded a £600m contract to operate two new prisons at Belmarsh West in London and Maghull in Liverpool.

(3) Zurich Municipal, Public sector supply chain: risks, myths and opportunities, 2009

(4) The Guardian,AbridgetoofarforPFIschemes,18 April 2009

(5) FM-World,Outsourcing FM could save government billions,19 October2009

There is another Way

In September 2009, the Secretary of State for Health announced that the "NHS is the preferred provider" in the provision of its existing services where it can be show it can do so at high quality and value. If NHS services are failing and are not improved upon then commissioners can open up tenders to alternative NHS, private or voluntary providers. The Secretary of State acknolwedged that it is usually more efficient to fix the current service than go out to buy a new one and that it is fairer all round for staff to be given a chance to improve.

A study undertaken by the Association of Public Service Excellence (APSE), highlighted small but growing signs of antipathy towards outsourcing. Looking at 50 councils, APSE found that the main reasons for returning services in-house was the poor performance of contractors. In many cases contracts had been terminated early, with cost implications for the council but more significantly, with little progress made towards greater efficiency. It appears that decisions to end these contracts appear to be driven by entirely pragmatic reasons – essentially providers have failed to live up to expectations. (6)

MYTH 3 Competition is the best way to improve public services

REALITY Public Services are too important to compete on price

The imposition of competition and markets in the public sector means driving a wedge between client and contractor roles and usually results in the restriction of in-house delivery. Local authorities, NHS Trusts and other public sector bodies are required to become ‘commissioning’ organisations, in effect to be a client and to contract the provision of services to outside organisations. Competition is therefore limited between private firms and consultants and cannot be said to be true competition.

Competition can be a powerful lever of economic innovation. But the public sector is not, nor should be subject to real competition. The allocation of resources in the public sector should never solely be about price – public services are too important. Public services reduce inequality, promote stability, and are the only proven way to promote economic, social, and environmental security.

As long as a service remains in the public sector it retains at least the potential to be directed by meeting the needs of the public. Once the private sector takes over this potential disappears, and is replaced by the priority of profit maximisation. Public services are subject to a regime of democratic accountability that embodies political choice and as such provides a different kind of scrutiny than anything that the market might deliver. Public services are an essential component of a good society. They carry with them intrinsic assumptions about equity, access and accountability; this is not the case in the market.

Privatisation and outsourcing often leads to services being fragmented, with overly complex structures which make collaboration and cooperation difficult. This slide to fragmentation means that Ministers and public sector managers lose control over the quality and delivery of services. They also lose control over the pay and conditions of workers delivering services. The OPM study on outsourcing in the NHS found that it represents a “challenge to the lines of accountability due to the increasing complexity of outsourcing arrangements and diversity of approaches.”

The growth of competition also leads to increased transaction costs, linked to making and monitoring contracts, accounting, auditing, legal services, advertising and shareholders’ profits. Public sector resources are used in wide range of activities, from ‘stimulating the market’ to encourage private and voluntary sector organisations bid for contracts, to tendering and performance management. There are also high costs associated with bidding for contracts, which can act as a barrier to market entry and creates economies of scale that favour large providers both in the private and voluntary sectors.

Competition all too often leads to a race to the bottom, with providers in all sectors racing to compete on costs. This inevitably hits the workforce in terms of pay and conditions, training and staffing levels. A study by TUPE by the Social Care Employers’ Consortium looked at the recruitment and retention of the third sector social care workforce and particularly contracting out from the public to the third sector.

(6) APSE,Insourcing:Aguidetobringinglocalauthorityservicesbackin-house,2009

It reported that, despite clear guidance that TUPE should apply to all transfers in an outsourcing situation, many local authorities still ask for a TUPE and non-TUPE price in their tenders. It states that ‘tenders, especially those which have a turnaround time of a few days, are costly to prepare and having to provide two separate bids doubles the cost of staff time.’ It goes on to describe the code of practice on the two-tier workforce, which was designed to ensure that in a transfer situation, new employees were treated equally to those of transferring staff. It states that the code is ‘often ignored by local authorities which are cost driven.’ It quotes one employer: “We lost a contract because a local authority and a new supplier ignored the two-tier workforce regulations. Now we don’t mention it unless the local authority does,which isn’t often.”

Britain’s Homecare Scandal – BBC Panorama

“Care of the elderly is a lucrative industry after the doors were opened to private companies in the 1990s. Research from the London School of Economics, commissioned by Panorama, found that 70% of home care is provided by the independent sector today and is worth £1.5 billion. The figure was just 2% in 1992. English local authorities spend around £22 an hour providing elderly care, but the independent sector provides it for around half that.

Panorama went to South Lanarkshire in Scotland where an online auction decided the council’s new care provider. Domiciliary Care won the auction which saw bidders bidding down, not up. It’s one of Scotland’s largest care providers looking after more than 1,500 people. While it won with a bid to provide care for £9.95 an hour, South Lanarkshire says the decision to award the contract was based only 40% on price with 60% based on quality of care.”

www.news.bbc.co.uk/panorama/hi/front_page/newsid_7990000/7990682.stm

(7) Social Care Employers’ Consortium, Social Care: Has Anything Changed?, 2008

Impact on the third sector Supporting People Programme - evidence to the Communities and Local Government Committee

Supporting People is a government programme to fund, monitor and improve housing-related support services. The inquiry into the programme expressed concern about pressure placed on third sector organisations as local authorities focus too heavily on the cost of providing services, as opposed to considerations of quality. Evidence was provided by several charities and third sector organisations, including Refuge, a domestic violence charity, who compared "the search for the cheapest possible contract" to the approach a local authority would take to letting "a contract for pot holes or some other local authority service." The subsequent impact of competitive tendering on small, often third sector, providers and their clients is considerable:

“[Competitive tendering impacts on] small, community-based care providers. Large organisations are much more able to compete for and win Supporting People services—by contracting out their own back- office functions, developing floating support services over large geographical areas, and benefiting from economies of scale. [...] the government’s own equalities agenda is being harmed. While the focus from government seems to be on the needs of local communities, the result of low-cost competition for care services is that specialist equalities groups rooted in communities will struggle. The Supporting People Programme - Communities and Local Government Committee, 2009 MYTH 4

The private sector is more responsive to service users’ individual needs

REALITY

Only the public sector can respond to society’s collective needs Public sector reforms are often based on the idea that public service users should be treated as consumers. In many cases, this focus is both appropriate and necessary. For instance, the emphasis in the NHS on developing ‘expert patients’ who will know about and take responsibility for their own conditions and are able to make informed choices is a welcome development, as is the promotion of user empowerment and independence in social care.

However, in many parts of the public sector, users do not engage with services on a voluntary basis but are subject to compulsory attendance, such as with the police or mental health service. And the public’s relationships with public services are often far too complex to be classified as consumers. People do not necessarily buy the service; they may have a right to receive the service; they may be refused a service because their needs may not meet the criteria laid down. But above all, there is often a collective aspect to public services, where the benefit extends beyond the individual, to families, schools, communities, the UK and other countries. It is this collective aspect of public services which requires them to be subject to democratic accountability and transparency. Privatisation erodes this accountability and treats vital services merely as contracts to be bundled up and sold off.

Barnet Council

Barnet Council is using the business model of budget airlines to plan a radical reform of public service provision. Unofficially dubbed “easyCouncil” the project is part of the borough’s “relentless drive for efficiency” and could see residents paying extra for some local services.

The council’s aim is to turn itself into a focal point called a strategic commissioning hub to commission public services from private and voluntary sector organisations. Barnet also plans to stop providing some services altogether - ’scaling down to a size which would mean delivering only what the local authority must deliver to achieve efficiencies’ - and to outsource the rest.

The council had also planned to save £950,000 by removing onsite residential wardens (whose tasks include dealing with health and security emergencies, organising GP visits, organising social activities, and checking on residents at least once a day) from sheltered housing scheme. They would be replaced with a ‘floating’ support service where support workers based at hubs would visit elderly people who met eligibility criteria. In December 2009, a High Court ruling prevented the plans on the grounds that they did show due regard to the need to take account of disabled persons’ disabilities.

Academy Schools

The growth of academy schools represents a transfer of assets and power to unaccountable entrepreneurs, business and religious groups. Parent power is generally weaker in academies than in maintained schools – including reduced representation on governing bodies, weaker appeals processes for admissions, exclusions and special educational needs, and reduced capacity to withdraw pupils from acts of religious worship. Under current rules, academies must appoint only one parent or guardian on governing bodies, even though parents and guardians usually form the largest group of governors at state schools.

There has also been a steady growth in the number of chains and federations of academies, meaning that a single unaccountable organisation or individual is responsible for a vast array of educational provision including the development of the curriculum, admissions and staff terms and conditions.

There are also wider accountability issues related to academy schools. Accountability in public services does not end with accountability to users, as schools play a social and economic role that goes beyond the interests of parents and guardian. Taking academies out of Local Authority control disrupts admissions arrangements within local authorities and in neighbouring authorities.

At the start of the Academy Schools project, sponsors were required to provide a one-off payment of £2million. Many sponsors, however, did not pay or chose to pay ‘in kind’. This requirement has now been dropped. Productivity can be assessed in the private sector by looking at the balance sheet. By definition, this is not possible in the public sector. Rather, public sector productivity is centred around the notion of public value, with services that respond to the needs of citizens, that are sustainable, provide long-term value for money and are trusted by citizens. We know that financial pressures will require a sharper focus on value for money, but cost should never be the prime driver for public services. Public services are not a drag on the UK economy; but a vital part of it, delivering health and social care, crime prevention, education, fire safety and many other important services.

Myth 5

The public sector has a worse productivity record than the private sector.

REALITY

Public services create public value

The CBI uses government statistics to show that public sector productivity has declined by an average of 0.3% over the period 1997-2007 and that over the same period, labour productivity in the private sector increased by an annual average of 2.8%. The CBI states that these diverging trends are “undesirable and unsustainable.”(8)

Productivity measures in the public sector are notoriously problematic and weneedtobeverycarefulin interpreting data on productivity. It can be seen, for instance, that increasing class sizes in schools may lead to perceived greater productivity by individual teachers, ie the ratio of teachers to schoolchildren. But it is doubtful that increasing class size would have a positive impact on the quality of education. Standard definitions of public sector productivity are a poor measure of public value and it is more important to look at efficiency, performance and outcome.

(8) CBI,doing more with less,2009

Myth 6

“Back-office” functions can be outsourced without impacting on front-line services

REALITY

Support functions are just as important as the front-line

In a recent document called “Doing More with Less” the CBI claims that ‘sharing back office functions can improve efficiency” and that ‘non-core activities are best provided by the private and third sectors unless it is essential for them to be provided in-house.’

It is wrong to describe any public sector function as non-core or back-office. Public services are characterised by an extremely complex set of processes and relationships. For example, the gradual development of multi-agency approaches, with professionals working together across different public sector bodies create overlapping responsibilities and lines of accountability. Without so-called back office functions, frontline workers would not be able to do their job. The NHS would not be able to survive without the people who book appointments, analyse blood tests, process X-rays or make sure staff get their wages on time.

The pressure on “back-office” functions is greatest in the push to develop shared services. In many cases, shared services can be an effective way of delivering services such as HR, payroll and IT across different local authorities or public sector organisations and delivering long-term efficiency savings. Unfortunately, they are also associated with pressure to cut short-term costs and outsourcing. The Treasury’s Operational Efficiency Programme which advocates the use of shared services is based by its own admission, on "proxies, estimates and assumptions" of private sector standards of delivery. The push for shared services is based on an over-reliance on economies of scale over quality.

Shared Services

“By 2016 the majority of the transactional elements of Corporate Services in the public sector will be delivered through a handful of professional shared service organisations. Some of these organisations will remain inside the public sector, but many will be outsourced.” Cabinet Office, 2006. Southwest One

Southwest One is a joint venture between IBM, Somerset County Council, Taunton Deane District Council and Avon and Somerset Police to deliver a range of services under a 10-year contract. Southwest One is 75% owned by IBM, who will make £400m over the 10 years.

The joint venture has been strongly criticised for the lack of effective scrutiny, public engagement and secrecy – the contract has been kept secret for reasons of “commercial confidentiality.” It offers shared services in IT, finance, human resources, property management, purchasing, facilities management, customer contact centres and services to schools. Southwest One has a framework agreement which enables other local authorities and public bodies to obtain services bypassing the procurement process.

Exploding public sector pay myths: a briefing for trade union members

Summary All main political parties have put forward policies to freeze or curb pay for public service workers. This briefing looks at the implications of pay freezes in the public sector. It also takes on the commentators who say that pay restraint is justified on the grounds that public sector wages are running beyond the private sector.

Several newspaper stories have appeared recently stating that earnings growth is rising more than the private sector. It is true that the public sector has fared slightly better than the private sector over the recession, with average earnings growth of 2.8% in the public sector and 0.1% in the private sector in the year to November 2009.

However, we must take care with these figures and put them in a broader context of earning growth over a longer time period. Between 1993 and 1999 public sector pay fell below the private sector and led to recruitment and retention problems. In recognition of this, pay began to catch up between 2000 and 2004, but since 2005 pay was cut back again. In 2008, the average pay increase in the public sector as 2.5% when inflation was running at 4%.

The Institute of Fiscal Studies have stated that pay levels in the public sector are not significantly out of line with those of similar workers in the private sector, once factors such as age, education and qualifications are taken into account. Average earnings in the public sector are significantly affected by workforce composition with larger number of people in professional roles and higher qualifications than the private sector and generally, lower paid jobs have been transferred out to the private sector over the lastfewyears. This does not mean that the problem of low pay in the public sector has been eradicated. In fact, the public sector is a large employer of workers earning less than £7 per hour, accounting for a quarter of all such employees in the UK. (1)

Both inflation and private sector pay rates are likely to pick up later this year and next year, which will change the context in which freezes take effect. While many private sector employers froze pay levels in 2009, negative inflation meant this still translated into real earnings growth. Price inflation will become positive this year meaning that people’s living standards will be hit by a freeze much harder.

The public sector pay target has been below inflation for the last three years. Further restraint or freezes would not only reduce spending power in a key part of the economy, but also lead to a return to the recruitment and retention problems last seen in the 1980s and early 1990s.

There have also been wrong-headed calls to dismantle national pay bargaining to allow public sector pay to more closely match earnings in local areas. Holding back pay to match already low average earnings could generate a downward pay spiral in areas with weakest labour markets. And any system where schools or hospitals provided different rates of pay for the same job would only result in employment instability as people moved to other areas in search of higher pay. Destabilisation of the labour market could lead to variations in the quality and delivery of a wide range of public services.

National pay structures provide an efficient and transparent mechanism for dealing with large numbers of staff, underpinned by the principle of equal pay for work of equal value; local pay arrangements would only lead to pay discrimination and expensive litigation.

(1) www.poverty.org.uk/52/index.shtml#note1 Exploding public sector pay myths: a briefing for trade union members

Introduction

The economic downturn has undoubtedly had a huge impact on the UK workforce. Although the scale of job losses has been much less than originally feared, many people have had direct experience of redundancy, repeat spells of unemployment and pay penalties.

The recession has also had a massive impact on public finances and while the main political parties have differing ideas about how to get finances back on track, all have put forward policies to freeze or curb pay for public service workers.

This briefing looks at the implications of pay freezes in the public sector. It also takes on the commentators who say that pay restraint is justified on the grounds that public sector wages are running beyond the private sector.

“Whoever wins the election is going to have to ask from 2011 each part of the public sector to accept a one year pay freeze. I say to every public sector worker: it is the best way to try to protect your job during this period. We are all in this together." George Osborne, Shadow Chancellor of the Exchequer

"The gap between public and private sector wages has widened, reinforcing the need for a freeze in the total public sector pay bill as a key measure in battling the UK’s unsustainable budget deficit." David Kern, Chief Economist at the British Chambers of Commerce

“At a time when inflation is likely to be between 2% and 3%, a pain-free way of cutting public spending would be to freeze public sector pay.” Steve Bundred, outgoing Chief Executive of the Audit Commission

“The recession was caused by the collapse of a speculative bubble driven by bankers and the finance sector. It cannot be right to single out public sector workers to pay the price of putting it right.” Brendan Barber, General Secretary TUC

MYTHS AND FACTS ABOUT PUBLIC SECTOR PAY

According to the Institute of Fiscal Studies, public sector workers ‘have fared better than their private sector counter parts in the recession.(2) It is true that the public sector has not been subjected the same degree of job losses and pay freezes or pay curbs. It is also true that average earnings may have grown slightly faster during the recession in the public sector than the private sector but closer examination of pay and earnings reveals a much more complex story.

Tales of average earnings

Reports have recently appeared in several newspapers stating that earnings growth is rising more than the private sector. These reports use data from the Office of National Statistics and this data should come with a large sign attached saying “Danger, Handle with Care.”

Most of these newspaper stories attempt to show that in the year to November 2009, earnings growth in the public sector was rising at 3.8% compared to -0.1% in the private sector. This is based on Average Weekly Earnings (AWE) data.

(2) The IFS Green Budget: February 2010. www.ifs.org.uk/budgets/gb2010/10chap9.pdf

However, in reality, earnings in the public sector rose by 2.8%. The figure appears to have been artificially inflated to 3.8% by the inclusion of data from the nationalised banks, including Lloyds, Northern Rock and Royal Bank of Scotland.

Some newspapers tried to show that public sector workers earn more than £2,000 a year more than private sector workers. But the way they used the data was highly misleading.

They compared weekly earnings excluding bonuses. As Alastair Hatchett from leading pay analysts Incomes Data Services (IDS) explains, this is not really comparing like with like. He says that the most realistic comparison should be with total pay which includes bonuses – an important part of pay in much of the private sector. This shows that public sector workers on average earn just £6 a week or £313 a year more than private sector workers. Average weekly earnings in the private sector are £447 and the £453 in the public sector. If we include the nationalised banks in the public sector figure, this rises to £459. But as shown below, comparing private and public sector earnings is much like comparing apples and oranges and great take must be taken with these figures.

How is pay data measured?

The AWE data includes three measures:

  • Total pay, including bonuses;
  • Regular pay, excluding bonuses; and
  • Bonuses themselves to assess trends in bonus payments.

The way that AWE is measured and its treatment of bonuses is important because the bonus element of total earnings has become more significant in private sector pay in recent years and fluctuations have a bigger impact. Bonuses or incentive schemes are particularly prevalent in the finance sector, but are also widespread in the manufacturing and production sectors.

The use of bonuses payments has reduced considerably since the start of the recession, particularly in the finance sector. In the first part of 2009, the contraction of large City bonuses in the first quarter of 2009 was so large that it pushed earnings growth figures for the whole economy down by 6.3%. The presentation of this data illustrates the difficulties of comparing private and public sector earnings. The public and private sector have different skills compositions and earnings distributions and attempting to identify private sector counterparts for public sector workers is near impossible.

The public sector employs around 23% of the workforce, is dominated by women (around 70%) and has a larger number of people in professional roles and with higher qualifications than the private sector. The TUC’s own analysis of data from the ONS Labour Force Survey shows that the need for high-level qualifications in many public sector jobs accounts for much of the pay gap. For example, public sector employees are almost twice as likely to have higher education qualifications (the ratio is 53% public:28% private).

Another important factor is that lower paid jobs have over the last few years generally been transferred out to the private sector also affects workforce composition and average earnings. The Institute of Fiscal Studies confirms this, stating that ‘overall, pay levels in the public sector are Exploding public sector pay myths: a briefing for trade union members probably not significantly out of line with those of similar workers in the private sector, once you take into account factors such as their age, education and qualifications.’

Comparing private and public pay

The Government held a policy of public sector pay restraint from 2007 in the belief that this was necessary to control inflation. This policy, which led to below inflation rises, meant that earnings growth in the sector had been behind the private sector pretty much until the recession took hold at the end of 2008. In 2008, Last year when inflation was 4% the public sector got 2.5%.

Average weekly earnings (pay including bonuses) public (excluding financial services) and private sectors, Jan 2000 – November 2009

In April 2008, average weekly pay in the private sector was £445, compared to £434 in the public sector. The public sector average only overtook that in the private sector as the recession started to take hold and employers put in place pay freezes and pay restraint. As the economy picks up in the next year or so, we would expect that the private sector would take the lead again.

Incomes Data Services show the impact of the recession on pay settlements, with much lower pay settlements in the private sector in 2009 compared with 2008. They estimate that one-third of firms imposed pay freezes, while in some cases business paid lower bonuses and continued progression payments. The AWE data shows that large reductions in bonus payments contributed to lower earnings growth in 2009 compared with 2008.

IDS also show that earnings in the private sector were also reduced by the changing composition of the workforce, in particular the loss of full-time roles and the increase in part-time roles (repeating a trend from the recession in the early 1990s). Employees who are made redundant appear to be taking lower skilled and lower paid jobs and more women are entering the labour market.

Bonuses and pay settlements will probably pick up as the economy returns to growth. But since average earnings in the private sector are low at the moment, any increase in bonuses and pay increases in the future will look comparatively high and the rate of increase in the private sector will run faster than the public sector. And a return to the same old hullabaloo about who earns what and why.

What does the future hold?

The Government and the main opposition parties have all called for pay freezes or cuts.

The Government plans a freeze for senior groups and a 0%-1% limit for others not covered by long-term deals. The December 2009 Pre-Budget Report indicated that this approach should be extended for two years from 2011.

Labour is not seeking to reopen three-year deals for non-senior workforces, including NHS staff (due to get 2.25% or £420 in April), the teachers review body award (2.3% from September) or police officers (2.55% from September).

The 0%-1% limit would apply to doctors and dentists (over 180,000 workers), prison officers (over 30,000 staff) and about 300,000 civil servants not in three-year deals. The Treasury estimates that this would cover 750,000 people out of a total workforce of just over six million and save around £300 million a year.

The Conservative Party have promised a called for a one-year freeze but would “honour commitments already made” and exclude public servants earning less than £18,000 (around a third of all public sector jobs) or those “risking their lives for this country in Afghanistan”. This is estimated to save around £3.2 billion a year. Plans were also announced to reduce the size of Whitehall by a third, which would lead to thousands of job losses.

The Conservatives currently control most local authorities, where the employers have rejected the unions’ 2010 pay claim (£500 or 2.5%, whichever is the greater). Instead they have offered a pay freeze.

The Liberal Democrats propose zero growth overall for public sector pay, a 25% reduction in the total paybill of staff earning over £100,000, and a salary freeze plus a reduction in the use of bonuses for the civil service.

What will a pay freeze mean for public sector workers?

In December the Chancellor announced a 1% cap on public sector pay settlements for 2011-12 and 2012-13. In the Pre-Budget Report, this was changed to a cap on “basic pay uplifts.”

The real impact of a pay freeze depends on how it is implemented and which parts of the pay structure are affected. This is due in to the way pay settlements are handled in different parts of the public sector, particularly in relation to pay progression.

Most pay structures include pay progression to allow employees to move through a pay bad, reflecting additional experience, performance or skills. This allows individuals to move though a pay band, reflecting additional experience, skills or performance. For example, salary steps for NHS staff are worth around 3.5% at the middle of the range. School teachers in England and Wales on the main scale progress by steps worth around 7%. In the civil service, pay settlements tend to based on changes to the total paybill. An overall budget may be set which which includes increase to pay bands (revalorisation) plus other aspects including allowances, progression payments and performance pay. Therefore a budget increase of 4% may only result in a 2% increase on pay bands, as part of the budget uplift is used for other parts of the pay structure.

So if a pay limit applies just to the revalorisation of pay rates, then this would mean that pay progression may continue.

A Treasury spokesperson said that in 2010-11 the limit would apply to staff in post rather than pay progression or the bottom and top of pay scales, and that the 0%-1% figure would not represent the change in paybill. What this means in practice, however, will depend on what the Treasury remit for 2010-11 says when it is published.

The pay freeze planned for local authorities excludes incremental pay rises awarded to more than half the local government workforce which are on average worth between 1% and 2%. Those staff at the top of their grades will receive nothing.

What will be the impact of pay restraint?

In the short term, economic circumstances will change the context in which pay freezes will take place. For example, forecasts predict that inflation will rise to between 1.75% and 1.9%, on the Consumer Price Index and 2.9% on the Retail Price Index. Private sector pay rates are also likely to pick up this year.

As Duncan Brown, director of reward services at the Institute for Employment Studies has pointed out, while many private sector employers froze pay levels in 2009, negative inflation meant this action still translated into real earnings growth. However, in 2010, the situation in the public sector will not be similar to that experienced by the private sector in 2009. Last year, a pay freeze still delivered real income growth but price inflation will become positive this year meaning that people’s living standards will be hit by a freeze much harder.

The longer-term implications are harder to predict, but are potentially serious. Labour Research Department warns that the pay limit for 2010-11 and the interpretation of limits over the next three years could impact on pay comparability across the public sector. They say that for example, the current local government pay claim is based largely on comparisons with other public sector workers, especially in the NHS. Local authorities are well aware of this role and some have developed it further by adopting living wages. Mayor Johnson continues to back the London Living Wage, which has put him somewhat at odds with his party.

Since 1998 cumulative increases in basic pay have been worth almost 41% in health as against just under 37% in local government. The result is higher pay levels for jobs like cleaner, catering assistant, residential carer, social worker and nursery nurse. Minimum pay levels average £13,481 across a range of named public sector organisations, compared with the NJC minimum of £11,995.

Civil service unions have also been active in promoting the need for coherence across the many different government departments and agencies in order to address the inequalities in the different bodies, where similar jobs in the civil service can attract very different wage levels, terms and conditions.

A government policy towards pay freezes also threatens to undermine the independence of the pay review body system. Pay review bodies makes independent recommendations on pay for certain groups of employees in the public sector, after considering evidence from the Government, employers and unions, with the long-held expectation that the Government honours those recommendations. Imposed pay restraint undermining the pay review bodies and a tried and tested process of pay determination. It also places restrictions on the ability of government departments and agencies to negotiate their own pay settlements and to take into account particular equal pay and recruitment and retention problems.

Why calls to dismantle national pay bargaining are wrong

The Conservative Party has proposed an end to national bargaining for teacher’s pay, replaced by a pay body to set a national benchmark for salaries, allowing schools to pay over or under it as they see fit. The Chartered Institute of Personnel and Development, and the Public Sector People Managers’ Association also advised that the Government should scrap national pay rates and introduce more performance-related pay to cut the public sector wage bill, rather than cap pay awards.

Meanwhile, Professor Alison Wolf has written a report for the CentreForum think tank, which is linked to the Liberal Democrats. This calls for an end to national pay bargaining, stating that national pay systems ignore local differences, handicap struggling regional economies, and make it impossible for public sector managers and institutions to cope with the fiscal crisis. The report states that public sector workers should receive individual contracts from their employers, instead of pay and conditions set at national level. It argues that poorer regions, inflexible public sector salary scales handicap the private sector because employers cannot compete through lower costs.

It is difficult to see how the answer to helping tackle poverty in poorer areas is to lower the wages of those who work there. In many areas of the UK, the public sector provides a benchmark for decent pay and conditions and protection for lower paid workers. Holding back public sector pay to match already low average earnings could generate a downward pay spiral in those areas with the weakest labour markets, this could drive down pay rates further. This would particularly affecting disadvantaged areas, women and those in low paid occupations. It would also create huge problems in keeping control of the overall national pay bill in the public sector.

Individual contracts would create a huge level of bureaucracy, requiring public sector organisations to conduct their own salary surveys, set their own job grading structures for local pay, conduct local negotiations and investigate individual complaints over pay and grading. The use of local pay bargaining in the NHS was attempted in the 1990s. This proved to be a costly experiment which led to clinicians and other frontline staff spending long hours in negotiations with employers, thus diverting them away from their work of treating and caring for patients.

A system where schools or hospitals provided different rates of pay for the same job would only result in instability as people moved to other areas in search of higher pay and variations in the quality of the service provided to the local community. In contrast, national pay structures provide an efficient, consistent and transparent mechanism for dealing with large numbers of staff. They are underpinned by the principle of equal pay for work of equal value; local pay arrangements would only lead to pay discrimination and expensive litigation.

National pay structures also provide a way of ensuring that many public sector workers receive the appropriate training and regulation for their posts. This also allows geographical mobility as experience and skills are established and recognised. At the moment, recruitment and retention problems can be satisfactorily dealt with by recruitment and retention premia and high cost areas with high cost supplements within existing pay frameworks without resorting to local pay bargaining.

Cutting public sector pay would only store up problems for the future

The Institute for Fiscal Studies explains that ‘the Government would not benefit from the full reduction in public sector remuneration because public sector workers pay taxes on earnings received and may also receive benefits or tax credits.’ They estimate that for every £1 cut in public sector earnings, public spending is reduced by £1.19 but the government would save only 73 pence once loss of taxes and increased spending on benefits and tax credits are taken into account.

If the public sector pay workers less, then they will pay less employers’ national insurance, and their employees will pay less income tax and employees’ national insurance, as well as possibly being entitled to larger amounts of tax credits or other means-tested benefits. It will also lead to essential demand

Pay restraint in the early 1990s caused serious recruitment and retention problems across the public sector, only rectified by efforts to bring pay in line with the private sector. This also badly impacted on staff morale and motivation. Pay freezes will only make it more expensive to hire the next generation of public sector employees – leading to a boom/bust approach to workforce planning.

Fat Cats and Thin Facts

Following the MP’s expense scandal, there has been increased, and justified, scrutiny over how taxpayer’s money is used. This scrutiny has extended to senior pay levels and so-called fat cats in the public sector earning more than the Prime Minister.

Although there are some instances of very high pay in the public sector, this is not widespread, with most appearing to be employed by such organisations as the Royal Mail, BBC, Network Rail, Channel 4 and various regulators. Indeed, IFS explain that the distribution of wages in the public sector is significantly more compressed than that in the private sector. In general, there are fewer who are very poorly paid and fewer who are exceptionally well paid. They state that the public sector worker at the 95th percentile of the public sector wage distribution (for full-time males) earns 3.8 times the amount earned by his colleague at the 10th percentile. The private sector relativity is 4.7 times, representing a big difference between the sectors.

IFS conclude that there is little serious evidence that the highest-paid employees in the public sector are overpaid relative to their private sector counterparts. While it is unfair that there is a there is such a huge gulf between those paid most and the lowest paid, it is unfair to paint a picture of uncontrollable pay in the public sector.

Speak up for Public Services represents 26 public sector trade unions, together with the TUC.