Steve Vale, HR Consultant, looks at and comments on the case made by a new report from the TUC.

Outline

At the end of March 2017, the TUC published a report on pay in the public sector (Lift the Cap — A Fair Deal for Public Service Workers), which noted that, with public sector workers over halfway through a decade of Government-imposed pay restraint, five million people delivering public services, from job centres to hospitals, schools to local councils, have seen six years of pay freezes and pay caps. As a result, many public sector workers will have seen their pay cut by over £2000 in real-terms, once inflation has been taken into account. The report takes a snapshot of the current situation for public sector workers and looks at the impact on morale and on recruitment and retention. In the light of increasing levels of inflation in the post-Brexit economy, it seeks to persuade the Government and employers to take a new look at how they are treating the workers who are the lifeblood of essential public services at the heart of communities.

Background to the report

The report shows that the average public sector wage has been cut in real-terms by 3% between 2010 and 2016 using the Government’s preferred Consumer Prices Index (CPI) measure of inflation, or 7% if the Retail Prices Index (RPI) measure (which includes housing costs) is used. Furthermore, it notes that, if the current public pay policy continues, by 2020 most public sector workers will be earning over £1000 less in real-terms than in 2010.

It says that public service employees have worked hard to maintain the quality of services, but that this is an uphill struggle and many of those working in public services believe they are suffering as a result, in terms of morale and of the ability to recruit and retain staff.

It sets out a resume of public sector pay policy since 2010, noting this has been an integral part of the Government’s wider public sector reform since then — since the public sector pay bill constitutes around half of current public spending, pay restraint has been an inevitable and integral part of a deficit reduction programme primarily based on cuts to public expenditure.

  • In 2011/12, the Government imposed a two-year pay freeze.

  • This was followed by a 1% pay cap on the public sector pay bill until 2015/16, to which all public sector employers were expected to adhere, either through negotiations between employers and unions, such as in the civil service and local government, or through the terms of reference applied to independent public sector Pay Review Bodies (PRBs) that determine pay awards in areas like health, education and the prison service.

  • In the Summer Budget 2015, the Government announced that it will “fund public sector workforces for a pay award of 1% for four years from 2016/17”.

  • In a letter from August 2015 to PRBs, the then Treasury Minister Greg Hands MP stated “the government expects pay awards to be applied in a targeted manner to support the delivery of public services, and to address recruitment and retention pressures. This may mean that some workers could receive more than 1% while others could receive less; there should not be an expectation that every worker will receive a 1% award”.

While these policies have, for the most part, been against a background of very low inflation, by March 2017 CPI inflation was running at 1.8% and RPI inflation at 2.6%. The Office for Budget Responsibility (OBR) is forecasting inflation growth to remain upwards of 2% from 2017, as the impact of Brexit is felt. This suggests that limiting public sector pay increases to 1% will lead to an intensification of real-terms pay cuts in the public sector over the next five years.

The report rather skips over the impact of the National Living Wage (NLW) on the level of earnings for employees at the lower end of the pay spectrum. It notes that over 46,000 local government employees will be covered by the Government’s NLW as it progresses towards the 60% of median earnings target in 2020 (and that increasing numbers of NHS staff will also require significant pay uplifts from next year), without commenting on the real-terms impact on the pay levels of those employees, which has already begun to be felt.

It does however seek to emphasise the fact that (as local authority employers are only too well aware) no adjustments to the Government’s public sector pay policy have been made in respect of the continuing impact of the NLW. The combination of a pay cap and the application of the NLW implies that employees paid above a certain level are most at risk of seeing little or no pay increases during the next few years, with real earnings being further eroded by inflation. Lower paid workers may be more insulated from this, because:

  • the NLW will improve the real-terms earning of the very lowest paid

  • the need to preserve differentials for those paid at the level immediately above those who benefit from the NLW is likely also to drive better increases for these employees than for those at higher levels.

With NLW costs having to be absorbed within an overall 1% per annum pay increase envelope, the effect can only be to suppress the level of increases paid to those paid at higher levels.

The impact on public sector wages between 2010 and 2016

Given the impact of the NLW at the lower end of the pay spectrum, it is perhaps not surprising that the TUC’s report focuses on professional or semi-professional roles to illustrate the erosion of real earnings over the last six years.

It shows that, between 2010 and 2016:

  • a Band 6 midwife suffered a real-terms pay cut of £3150 or 8.2%, against the pay level which would have applied if the 2010 pay rate had increased at the same rate as the CPI

  • a Band 6 nurse suffered a real-terms pay cut of £2467 or 8%, against the pay level which would have applied if the 2010 pay rate had increased at the same rate as the CPI

  • a school teacher outside London suffered a real-terms pay cut of £2283 or 6.4%, against the pay level which would have applied if the 2010 pay rate had increased at the same rate as the CPI

  • a firefighter suffered a real-terms pay cut of £2038 or 6.4%, against the pay level which would have applied if the 2010 pay rate had increased at the same rate as the CPI

  • a Band 3 ambulance driver suffered a real-terms pay cut of £1213 or 3.8%, against the pay level which would have applied if the 2010 pay rate had increased at the same rate as the CPI.

(It is noticeable, even within these selective figures, that the ambulance driver (paid at roughly two-thirds the level of the other posts quoted) suffered a much lower real-terms pay reduction against CPI).

A full assessment of the impact of pay restraint in the public sector in the last five years, would, of course, also need to look at and compare pay movements in other sectors versus inflation indices during the same period. This is a very complex area, and it is understandable that the TUC’s report does not venture into it. However, some acknowledgment of recent analyses that show that, in broad brush terms, there has been no real-terms pay growth across the wider UK economy, with real-terms decreases in some sectors, would offer a more balanced view.

Instead the report merely states that pay restraint, combined with excessive workloads, restructuring and job losses, has led to a crisis in staff morale across every part of the public sector, with pay cited among the primary reasons in most surveys of workers in health, education, local government and the civil service.

The future impact of pay restraint in the public sector

Notwithstanding its failure to put past public sector pay movements and their impact in the overall economic context, the report is probably right to focus on the likelihood that in the future, as pay starts to recover in the private sector, increasing numbers of public sector employers will see recruitment and retention issues, particularly in skilled and specialist roles. As noted above, the combination of the NLW and a continuing pay cap will mean that pay erosion will hit these roles the hardest.

The report notes that, in addition to pay restraint, a number of other elements are likely to have an adverse impact on public sector earnings in the next few years:

  • significant increases in pension contributions for public sector workers arising from changes to public sector pension schemes

  • increased NI contributions as a result of the ending of contracting out and the move to a single-tier state pension

  • changes to in-work benefits through ongoing freezes in the value of tax credits and, in the next few years, changes to the Universal Credit, which will substantially reduce the incomes of families at the bottom end of the income distribution, with a worse impact on working families than out of work families, even when increases to NMW and income tax personal allowances are taken into account; substantial increases in regulatory body registration fees that are mandatory for some public sector workers.

As a result, the pattern of real-terms cuts in pay for public sector workers is set to intensify over the next five years.

The report looks at the combined impact of public sector wage growth held at 1% and the OBR’s inflation forecasts released at the time of the November 2016 Autumn Statement, and projects real-terms impact of the pay of specific roles during the period between now and 2020/21:

  • a midwife would see a real-terms reduction of £1691

  • a teacher would see a real-terms reduction of £1576

  • a nurse would see a real-terms reduction of £1366

  • a firefighter would see a real-terms reduction of £1423

  • a Jobcentre supervisor would see a real-terms reduction of £1187

  • a social worker would see a real-terms reduction of £1817

  • a UK border force officer would see a real-terms reduction of £1296

  • an ambulance driver would see a real-terms reduction of £943.

In all cases, this amounts to a real-terms reduction of 4.8% over the five years from 2016 to 2021.

Comparing expected movements in public and private sector pay in the next five years

While, as noted, the TUC’s report shied away from comparing private and public sector pay movements during the past five years, it is more forthcoming when comparing likely pay movements in the future. It uses OBR forecasts made at the time of the 2016 Autumn Statement to show that real-terms pay growth in the public sector is set to decline significantly against real wage growth in the wider economy.

The OBR’s analyses show that average real earnings in the whole economy peaked at £522 per week in 2008 and in the public sector at £521 in 2010. Its forecasts now suggest that, in 2021, real earnings in the whole economy will finally return to pre-crisis peak, after 13 years, but that, at that point, average real earnings in the public sector will have continued to decline and stand at £52 per week below their 2010 level.

The report also notes that:

  • analysis by Incomes Data Research shows that, in September 2016, public and private sector average weekly earnings had achieved parity. Furthermore, this was largely due to the impact of very low paying parts of the private sector pulling down the private sector average. Average public sector earnings are now less than those in the finance and business services, construction and manufacturing sectors

  • a statement from the Institute for Fiscal Studies (IFS) that the Government’s announced 1% limit on annual pay increases for a further four years from 2016/17 is expected to reduce wages in the public sector to their lowest level relative to private sector wages since at least the 1990s. The IFS commented that this could result in difficulties for public sector employers trying to recruit, retain and motivate high quality workers, and raises the possibility of (further) industrial relations issues.

The report also draws attention to the impact of declining public sector pay levels on some of the regional economies in the UK. It says that the loss of purchasing power through pay restraint has been exacerbated by a substantial fall in public sector employment within each region, with a particularly hard impact in those regions with a greater reliance on public sector employment, higher unemployment and weaker labour markets in the North, Midlands and South West.

It quotes the Staff Side submission to a recent NHS Pay Review Body which stated that: “In total, over £4.3 billion has been cut from NHS staff salaries in England alone between 2010 and 2016. This ... represents lost purchasing power to the UK economy at a time of slowing economic growth as the disposable income of NHS staff has reduced.”

The impact on employees

The TUC report focuses on the impact of public sector pay-capping on individual employees in terms of both finances and morale.

In terms of finances and living standards, it notes that:

  • a significant majority of respondents to union member surveys are feeling the pinch. In the NHS, 63% of UNISON members and 79% of Unite members responding to surveys said they felt worse off than they did 12 months ago

  • many of the 21,000 health service members responding to the UNISON pay survey of October 2016 stated that increased food, transport, utility and housing costs were having a serious impact on their cost of living

  • the same survey indicated that two-thirds of staff had used financial products or made a major change to their standards of living over the last year. Of that group of two-thirds:

    • 73% asked for financial support from family or friends

    • 20% used a debt advice service

    • 17% had pawned possessions

    • 16% used a payday loan company

    • 23% moved to a less expensive home or remortgaged their house

    • just over 200 respondents said that they had used a food bank in the last year.

  • the largely low-paid and female workforce in local government has been particularly badly affected by pay restraint, as evidenced by an Incomes Data Research survey for UNISON of over 2000 local government members, which found that:

    • some 70% of respondents reported that living costs had increased over the last 12 months, while just 26% report an increase in their personal income

    • forty-two per cent of respondents have personal debt and a worrying proportion of those (24%) owe £10,000 or more

    • a majority of respondents found it “more difficult” or “much more difficult” to cover food, general living costs, utility bills and travel costs

    • between two-fifths and half of respondents found costs relating to housing, healthcare and credit cards or loans hard to pay.

The report also gives examples of the other factors which will have a negative impact on pay levels in the next few years, including:

  • the increase in Teachers’ Pension scheme contributions meaning that, in addition to a real-terms pay cut, in 2017/18 a teacher at the top of the main pay band will expect to pay an additional pension contribution of £589 when compared with their 2012 contribution

  • the majority of midwives seeing their pension contribution rise from 6.5% to 9.3% from 2012 to 2015, with increases to National Insurance (NI) contributions for members of the NHS pension scheme by 1.4% from 2016

  • midwives seeing increases of over 30% to their Nursing and Midwifery Council (NMC) registration fees (midwives must pay their fees to legally work as a midwife).

In terms of morale:

  • the same UNISON survey of health service members showed that over half felt that morale was low or very low in their workplace, and 65% claimed that it had worsened in the last 12 months

  • it also revealed that over half of members had seriously considered leaving the NHS over the last year — the top factors for doing so were:

    • increased workload — 67%

    • stress at work — 67%

    • feeling undervalued by management — 59%

    • feeling undervalued due to low levels of pay — 58%.

The report sets out a series of case studies of public sector workers from across different parts of England describing the impact that cuts to real-terms pay are having on their lives, their workplaces and the services they provide. (As with the pay erosion figures referred to above, it is noticeable that the case studies mainly feature employees in professional or semi-professional roles.)

Issues raised in these case studies include:

  • the impact of short-staffing on morale, when there is no funding available to cover staff absence

  • the impact for some staff of having to deal with increasing demand as they deal with more deprivation and resulting pressure on families — benefit cuts have impacted on a lot of families so that the demand for services is greater, but with less resources available

  • the difference between salaries for comparatively skilled jobs in the public and private sector is becoming increasingly stark

  • the impact of more paperwork, the increasing size of caseloads and the level of pressure from worries about making mistakes

  • major increases in workload coupled with small pay increases, which fail to keep pace with the cost of living, and little appreciation

  • additional work relating to a new Code of Practice but no extra staff provision to cover it

  • continual crisis management at work, with no opportunity to plan ahead

  • difficulty in filling posts when senior staff retire

  • no pay for additional hours worked — just a theoretical ability to take compensating time off

  • worry over job insecurity

  • a poor working environment, with shabby and dirty office accommodation, and an insistence that employees work at home, even if inappropriate

  • a focus on data and meeting targets to the detriment of service standards offered to the public in the widest sense

  • the impact of high turnover levels.

While all the workers in the case studies also refer to how their pay has been eroded, how they find it increasingly difficult to afford basic living costs and how they do not feel that they are properly rewarded for what they do, it is noticeable that many of the negative features they refer to are not, strictly speaking, directly pay-related.

The abiding impression from all 16 case studies provided is how non-pay issues have served to compound the impact of real-term pay reductions over the last five years — the issues are as much about the way workers feel they have been treated, and the demands put upon them, as about the way they are rewarded.

And there is evidence that some workers fear that Brexit will increase further the demands they face — a recent survey by Boundless and Public Sector Executive magazine indicated that a quarter of public sector workers fear that Brexit will increase workload and workplace pressures, with negative impact on their work-life balance.

The impact on recruitment and retention

The report’s section on future recruitment and retention picks up on the importance of the relationship between pay and non-pay issues in drawing attention to a growing consensus that the Government’s public sector pay policy is unsustainable, particularly in its twin aim of restraining pay while seeking workforce engagement in transforming services and developing new delivery models.

It says that this consensus is reflected in the findings and recommendations of PRBs, informed comment from key public service think tanks, and commentators and from representatives of public service employers.

Among others, it quotes the School Teachers’ Pay Review Body’s 2016 report: “Our analysis of earnings data showed that the relative position of teachers’ earnings has deteriorated further this year and they continue to trail those of other professional occupations in most regions. We are concerned about this further deterioration in the recruitment and retention position when set against strong demand in the graduate labour market and continuing concerns in the profession about workload …”

It notes that the report of the 2016 NHS Pay Review Body said: “NHS staff are highly motivated and committed to delivering high quality patient care; for the majority this is what attracts them to work in the health sector. However, the pressures within the system are high and increasing and appear to be having an effect. Coupled with low pay awards this all serves to make many staff feel undervalued …”

It quotes a 2016 Health Foundation report: “Pay determination should be a lever to improve performance and service delivery. It should also recognise the contribution of staff, and motivate them to continue to contribute. The longer the centralised ‘freeze’ goes on, the less pay and associated reward can be a policy lever to achieve these objectives, locally or nationally.”

It notes that, for the first year in recent times, more than half of the respondents to the Senior Civil Service Pay Survey 2015 said they are aware of recruitment difficulties in their organisation, with a number pointing to the need to readvertise some jobs due to a lack of qualified applicants. For retention, the situation was reported as being even worse with nearly 60% of people reporting retention difficulties in their organisation compared with 46% in the previous year.

The report’s conclusions and recommendations

The report concludes:

  • pay stagnation has been acutely felt by public sector workers — manifested in a growing crisis of morale, recruitment and retention in many parts of our public services

  • pay stagnation has also come at a time of rising demand, major restructuring and reform of public services and a number of other reforms that have affected the total reward package of public servants, including changes to pensions and exit payments

  • given the growing pressures on recruitment and retention and the knock-on effects on service quality and the need to stimulate economic growth, particularly in the north and midlands, the TUC believes that the Government should signal a change of direction on public sector pay

  • the Government’s public sector pay policy has become unsustainable and that employers and unions should be able to negotiate wages that reflect the needs of our public services, through collective bargaining or genuinely independent PRBs as appropriate.

It recommends that:

  • PRBs should be reformed to ensure that relevant workforce and employer voices are included within board membership, for example, through the appointment of PRB members with trade union experience, and that PRBs should be able to look at a wider range of issues than affordability — focusing on recruitment, retention, market comparisons, staff morale and the impact on services

  • the Government should work with public service employers and unions to place more value on all employees delivering public services by adopting the widely supported voluntary living wage, which is currently £9.40 per hour in London and £8.25 in the rest of the UK

  • the Government should increase the NMW as quickly and strongly as can be sustained

  • public sector employers should develop fair and sustainable pay structures that are easy to explain, understand and operate, with shorter pay bands and that guarantee progression based on transparent and objective appraisal systems, agreed in partnership between employers and unions.

It is slightly odd that only the first of these recommendations is firmly based on the logic of the report. The report suggests that, as a result of the NLW, the strongest impact of pay erosion is being felt by workers paid above the lowest rates, and implementing the recommendations relating to minimum wage rises would, by itself, have little effect on them. And the issue relating to pay structures is mentioned in neither the report nor the case studies.

Commentary

Despite some issues with its own internal logic, the TUC’s report is effective in drawing attention to the unsustainable and contradictory nature of the current public sector pay policy in terms of both its relationship to likely pay movements in the wider economy and the contradictions of restraining pay while seeking workforce engagement in transforming services and developing new delivery models.

As this article was being written, a general election was called, which perhaps calls into question the report’s expectations about future pay movements in the public sector. But, on the face of it, there would appear to be little prospect of change, and little scope for public sector employers to do anything other than comply with the Government’s policy of future pay restraint, at least in terms of core pay settlements for the majority of employees.

Assuming that this is the case, the real value of the report is in highlighting that the issues to be addressed are not simply those of pay, or of pay movements relative to other sectors. As the case studies in the report show, addressing other issues affecting the treatment and experiences of workers, and ensuring that they do not compound pay issues, will be a crucial challenge in the next few years.

In this context, the reward model put forward in the Local Government Association’s recent (December 2016) publication Applying a Reward Strategy in Local Government may provide a useful start for organisations wishing to review their future approach to pay and reward. This would lead to an assessment of all aspects of employees’ perceptions of reward and how they are valued, covering:

  • quality of work

  • work/life balance

  • inspiration and values

  • future growth and development opportunities

  • the work environment

alongside issues of tangible reward. Real progress across these issues could go a long way to address the challenges facing the sector and its workforce in the next few years.

References

The TUC’s Lift the Cap — A Fair Deal for Public Service Workers report is available at www.tuc.org.uk.

The LGA report Applying a Reward Strategy in Local Government is available at www.local.gov.uk.

Steve Vale is a Consultant in Human Resources and is a regular contributor to Croner-i HR for Local Government. Croner-i HR for Local Government is an online employment law and practice reference source designed specifically for HR Managers and their teams in local government.

Last reviewed 7 June 2017