Last reviewed 3 May 2018

March 2018 was a big month for the public sector. With the NHS and local government pay awards taking shape, Tricia Palmer assesses the impact of the increases in the living wage, and the requirement to report on the gender pay gap.

I have worked in local government for over 30 years and seen the influence of fluctuating pay first hand. I remember the 1980s/early 1990s when the pay award was eagerly awaited, but years of austerity appear to have left public sector workers flat and resigned. However, is the tide changing with employees becoming increasingly dissatisfied with their pay? What about the possible impact of Brexit, where many European workers are considering leaving or not coming at all making scarce skills even more difficult to obtain? What is the impact of the National Living Wage (NLW) on low paid workers and the consequent requirement for increased funding? Is the gulf between private and public sector pay real? This article considers these issues and reviews whether it is time to rethink public sector pay.

Background to pay awards

The strategic direction set out by the Government for public sector pay states that we need:

“A pay policy designed to ensure that public sector pay packages continue to recognise workers’ vital contributions, while also being affordable and fair to taxpayers as a whole. The aim for the wider public sector is to reform and modernise terms and conditions, developing more affordable, sustainable pay systems.”

The Government has confirmed that the across-the-board 1% public sector pay cap will no longer apply to pay awards for 2018/19. There is now some recognition that, in parts of the public sector, particularly in areas of skills shortage, flexibility to go above the 1% may be required to ensure continued delivery of public services. However, in return, the Government has stated that it expects improvements to public sector productivity to continue; productivity has improved by 3% over the last six years at a fairly steady rate of 0.5% a year. In addition, it is inevitable that the recent lower forecast by the Office for Budgetary Responsibility (OBR) for productivity growth in the economy as a whole will affect the affordability of specific pay awards. This is in the context of the Government’s stated aim of reducing personal debt, as well as public sector debt. The fiscal rules approved by Parliament in January 2017 committed the Government to reducing the cyclically adjusted deficit to below 2% of gross domestic product (GDP) by 2020/21 and having debt as a share of GDP falling in 2020/21. It is intended that this approach will lead the UK towards a balanced budget by the middle of the next decade. The OBR forecasts that the Government will meet both its fiscal targets, and that borrowing will reach its lowest level since 2001/02 by the end of the forecast period. However, these targets will require ongoing discipline in public spending.

Public sector pay currently accounts for around £1 in every £4 spent by the Government, and the public sector pay bill figure for 2016/17 was £179.41 billion, up from £173.19 billion in 2015/16. Public sector pay policy clearly plays an important role in controlling public spending, and so the stated aim of pay recognising employees’ vital contributions against this backdrop is inevitably a difficult circle to square.

Local government pay award

With the lifting of the 1% cap the local government pay award (2018/19) is likely to be agreed, despite a narrow margin of support from the trade unions, and in effect will be an award of 2% per year for employees being paid over £20,000 with some bottom loading to reflect the NLW. However, for many this was seen as too little too late, and this is reflected in the headline local government pay awards over the last decade, which were:

April 2009: 1%

April 2010: No offer (0%)

April 2011: No offer (0%) 

April 2012: No offer (0%)

April 2013: 1%

January 2015 (not backdated to April 2014): 2.2%

April 2016: 1%

April 2017: 1%

The trade unions maintain that these awards over the last eight years represent a real cut in wages of 21%, and Unison made the following observations in its pay claim this year.

  • A continuation of the 1% pay cap would represent a further squeeze on our members’ quality of life that is even worse than during the 1980s and 1990s.

  • The bottom rate of pay in local government — £7.78 — is only 28p above the NLW and well below the Living Wage Foundation UK rate of £8.45 and £9.75 in London.

  • Inflation is predicted to remain in excess of 3% for the next five years. This means that the cost of living for our members will rise by nearly 18% by 2021.

  • National Joint Council (NJC) workers on the bottom pay point will require a 15.7% increase in pay to reach the currently projected rate for the NLW of £9 per hour by 2020.

  • Women are more than three quarters of the NJC workforce. The gender pay gap has widened in the public sector since the pay cap was introduced, even though it has narrowed in the wider economy. Endemic low pay is a gender issue and represents the undervaluing of women’s skills, knowledge and experience in schools and council services.

In this context, the trade union claimed that “only a settlement of at least 5%, with the bottom pay point set at the level of the Foundation Living Wage, would be a fair reward for their endeavours and lost wages.”

While many local government employers have sympathy for the recent squeeze in wages, particularly the lower paid, it was clearly not financially viable or politically acceptable to go this far. Even the current increase, at a cost of 5.6% over the two years, is putting pressure on already over-stretched budgets. This is complicated by the review of the national pay spine, which has left many authorities needing to review their pay and grading arrangements to reflect the changes in the cut off points between grades.

Private sector comparisons

It is also interesting to note here the differences between public and private sector pay. Although the migration of workers between the sectors may at times appear to be relatively low, there is continuing public debate about who is better off, which feeds into the perceptions of pay and benefits in the public sector. Fluctuations in private sector pay are greater in times of financial crisis or boom periods, where pay can decrease or increase more rapidly, whereas public sector pay appears to remain more steady. It is often asserted that public sector pay is better than in the economy as a whole, especially when pensions are taken into account, and this has recently been used to support the need for continued restraint in public sector pay. The Institute of Fiscal Studies (IFS) identified that public sector pay continues to be higher than the pay in the private sector, despite the previous years of pay restraint, with average weekly wages last April of £506 compared to private sector weekly wages of £464. However, these comparisons are difficult as the public sector figures do not include pensions, and the private sector pay figures do not include bonuses. In addition, a comparison of workforces shows that the public sector workforce is older and more qualified than the private sector. The public sector employs more women (75% compared to 46% in the private sector) and there are wider variations in pay in the private sector. Generally, the lower skilled jobs are better paid in the public sector, while the more skilled and senior roles attract higher remuneration in the private sector, particularly when bonuses are taken into account.

More recently the IFS has made comparisons that show public sector workers to be around a fifth better off than their private sector counterparts when benefits, such as pensions, are taken into account. The average public sector wage is around £28,000 per annum, while the average in the private sector is £27,000 per annum. However, when pensions are taken into account the gap increases, with the public sector employer contribution amounting to £6000 a year compared to the £2000 private sector employers contribute. This is the main source of national debate, with public sector “gold plated” pensions being the bone of contention, with public demands for change. In this context, the IFS report also stated that only 12% of public sector employees are on final salary schemes compared to 38% in 1997. Jonathan Cribb (author of this report) stated: “There is substantial variation in the estimated differential between public and private sector pay for different types of workers and across different parts of the country. This might suggest differentiating pay awards going forward. The uncomfortable truth is that it is lower paid workers, women and those in poorer regions, who do best in the public sector, relative to the private sector.”

What is of real importance here is the impact of pay restraint on our ability to recruit and retain skilled public sector employees to provide services that the public need. In a report produced last July, the Office of Manpower Economics reviewed the pay of public workers over the previous decade from 2005 to 2015. The following results are somewhat stark showing median pay adjusted for inflation to be:

  • doctors — £38 per hour in 2005 to £30 per hour in 2015

  • nurses — static at £16 per hour (although some predictions conclude that nurses’ pay will be down by 12% by 2020 compared to the previous decade)

  • police — £20 per hour in 2005 to £18 per hour in 2015

  • teachers — £25 per hour in 2005 to £22 per hour in 2015.

So, in real terms the pay of skilled public sector employees is reducing, making them worse off than they were 10 years or so ago. This perception (supported by reality) of feeling under-valued is feeding into the poor perception of reward and recognition among these workers.

Local government pay award considered

The previous years of pay restraint followed by the lifting of the 1% pay cap, and the need to comply with the NLW have led to probably the most complex local government pay award (2018/19) since the Single Status agreement in 1997. The Local Government Association (LGA) issued a letter to all councils in December 2017, outlining the reasoning behind breaking the (now lifted) 1% cap. The following details the context within which it offered a two-year deal of 2% for most employees, with some bottom loading.

The introduction of the NLW, announced by George Osborne in his July 2015 Budget, outlined a target level of 60% of median hourly earnings by 2020. This would amount to around £9 per hour, although the most recent (November 2017) Office of Budgetary Responsibility forecast was £8.56. At that time the minimum hourly rate on the Green Book pay spine was £7.00. This meant that there would have to be an increase of approximately £2.00 per hour in five years if the initial “target” for the NLW in 2020 of £9.00 was to be reached. By way of context previous increases in the bottom rate from £5.00 to £7.00 had taken 13 years to achieve (2002–15), and so this is a relatively high target to reach. The current two-year pay agreement covering 1 April 2016–31 March 2018, made some headway in bridging the gap and introduced minimum hourly rates of £7.52 (1 April 2016) and £7.78 (1 April 2017). This agreement included some further bottom loading in each of the two years to assist in maintaining differentials. This two-year deal added 2.40% to the national pay bill and gave a two-year increase of over 10% for the lowest pay point. These rates were then intended to provide some headroom in relation the NLW, which was £7.20 (1 April 2016) and £7.50 (1 April 2017), and £7.83 from 1 April 2018.

However, it has become clear that there is also a need to review the NJC pay spine, so that the continuing increases in the living wage do not mean that the NJC bottom point has to be constantly reviewed to keep pace, and to avoid ever squeezing differentials on the pay scale. The discussions involved a consideration of a one-year deal, but it was felt that a new pay spine could not be realistically implemented in this timescale. It was also discounted due to the fact that it would be too costly, if it were to start at a level that could ensure compliance with the likely levels of the NLW in 2019 and 2020, without further significant changes to the pay structure. A three-year settlement, while potentially attractive to councils from a financial planning aspect, would involve too much second-guessing of the broader economic position in 2020 and would be much more difficult for the unions to sell to their members. Therefore, a two-year deal, including a restructure of the pay spine was settled upon by the employers. The unions’ claim was for one year and sought a 5.0% increase on all NJC pay points, plus the deletion of the bottom four NJC pay points.

The final offer included increases of around 9% for the first three pay points (taking the bottom point from £15,014 per annum to £16,394) from 1 April 2018. Other pay rises up to spine point 19 amounted to between 8% and 4% increase, while salaries on and above £20,138 attracted a 2% rise. A new pay spine would then be introduced from April 2019, and would be based on the following.

  • A bottom rate of £9.00 per hour (£17,364) on new SCP1 (equivalent to old SCP6).

  • “Pairing off” old SCPs 6–17 inclusive to create new SCPs 1–6.

  • Equal steps of 2.0% between each new SCPs 1–22 inclusive.

  • By creating equal steps between these pay points new SCPs 10, 13, 16, 18 and 21 are generated to which no old SCPs would assimilate. This would mean that in some organisations the current number of pay points in a grade would change.

The original union response to this offer was one of rejection with some talk of industrial action, but after consultation with their members there has been a general agreement, albeit somewhat reluctantly to accept. This now means that councils are required to fund the award at a cost of 5.6% over two years, and work towards the restructured pay spine for April 2019. The restructuring of the pay spine is complex, as councils have chosen to use the spine in different ways, and drawn their grade lines at different points. One local authority I have been working with has ended up with some one-point grades due to the assimilation points, while another grade appears to be five points. It is going to take some careful work to ensure that the pay scale and grades work well, while not costing too much in the future or creating too much upset by reducing headroom. In addition, there will need to be an eye to differentials as grade lines change. Often national positions are difficult to square with local requirements.

Impact of the National Living Wage

In September 2016 Income Data Research issued a report for the LGA on the impact of the moves to comply with the NLW in local government. The research covered local authorities and some providers in the care sector. A number of issues, in addition to the obvious one of funding, were identified when increasing the salary of the lowest paid. The initial cost of implementing the NLW in local government in 2016 is estimated to have been around £4.7 million. One projection estimates that subsequent rises to £9 per hour in 2020 will increase total pay bills by 2%, with a total cost of £1.4 billion, and cover around a quarter of the workforce. This makes salutary reading, especially given other pressures, such as the increasing requirements for a social care workforce, where many of the lower paid roles exist. The Low Pay Commission has previously raised risks of non-compliance in the care sector, especially in the light of councils tightening up on commissioning of social care services in response to a squeeze on funding. It is also interesting to note here that the employer’s organisation, the CBI, has also expressed concern about the impact on social care.

The research therefore set out to obtain answers to the following key questions.

  • How councils have been implementing higher rates at the bottom of their structures either as a result of the recent NJC pay deal or of already following the recommended “Living Wage Foundation” pay rates.

  • How the issue of differentials will be dealt with as the lowest rates rise higher over the next four years.

  • How the higher wage costs will be managed by councils.

  • What scope exists for increased productivity or efficiency to offset costs.

  • What scope exists for redesigning lower paid, lower-skilled roles so they become more skilled compared with the better paid roles.

The main finding concluded it was early days, but there was some evidence that the impact of the higher wage reduced turnover. Prior to the recent NJC agreement, those councils who adopted the higher rates did so by adding supplements to pay to retain the NJC pay spine. These supplements were non-consolidated for pension purposes, and therefore kept the cost down and went some way to mitigating the squeeze on differentials with other more senior roles. Most councils said that raising lower rates had caused issues with differentials between supervisors and their staff, with some supervisors ending up in the same band as the employees they supervise. This appears to be particularly prevalent in the care sector where pay progression has been problematic to reductions in funding. Analysis by the Resolution Foundation found evidence of “bunching” at the minimum rate, and many care providers have reported having to increase rates for established care workers and supervisors alike to implement the new rates. One care provider reported costs of 0.7% (£370,000 over the next three years) of its pay bill simply to maintain differentials.

Although all councils interviewed reported taking steps to improve efficiency and productivity, these were more due to reduced government funding rather than the impact of NLW. Common themes were organisational and workforce development, implementation of new technology (including mobile working) and shared services. However, there was nothing startlingly new as a result of mitigating these costs, and there was little evidence of an appetite to review terms and conditions as had been previously predicted.

The picture is similar with the redesigning of roles, where employers are looking to upskill to provide greater flexibility. The NLW is simply the context to this rather than the main motivator. Only a small number of councils have implemented cost-saving measures to offset the NLW. There appears to be little appetite for further changes after the recent reductions due to austerity. This appears to demonstrate that the main organisations are preparing to absorb the additional costs, rather than increase productivity as described in the Government’s stated pay policy.

Gender pay gap

Public sector bodies employing more than 250 employees are required to publish their gender pay gap information by 30 March 2018. Many have left it up to the wire not wishing to be in the spotlight, but information so far indicates that more than 60% of councils (based on the submission from 196 councils) and 9 out of 10 NHS Trusts (based on 74 English Trusts) have a gender pay gap. At current rates of change it will take around 100 years to eliminate these gaps. The Government Equalities Office is saying that it will use the results to “better understand the causes of the gender pay gap and to target our efforts effectively to continue work towards eliminating it”. However, the causes of the gap are multi-faceted. The Fawcett Society, which campaigns for equality, says caring responsibilities can play a big part. Women often care for young children or elderly relatives, and this means that women are more likely to work in part-time roles, which are often lower paid or have fewer opportunities for progression. Another important factor is a divided labour market. Women are still more likely to work in lower-paid and lower-skilled jobs. Women currently make up 62% of those earning less than the living wage, according to the Living Wage Foundation. Discrimination is another cause of the gender pay gap; the Equality and Human Rights Commission (ECHR) has previously found that one in nine new mothers were either dismissed, made redundant or treated so poorly they felt they had to leave. This can create a gap in experience, leading to lower wages when women return to work. Men also tend to take up the majority of the most senior roles at a company, which are the highest paid. The Resolution Foundation maintains that if low-paid work was evenly distributed between men and women then the pay gap would immediately be reduced by 21%. In its recent analysis, the Foundation found that 20% of women were in low-paid jobs, compared to 14% of men (defined at £8.55 per hour). It will be interesting to note the impact of the NLW on women and low pay, but unless there is a dramatic change in the kind of roles women often take on this is unlikely to provide the step change necessary to narrow the gap significantly.

Across the UK, in the economy as a whole, men earned 18.4% more than women in April 2017 (Office for National Statistics), with the gap between men and women’s earnings for both full and part-time work falling from 27.5% in 1997. The initial gender pay gap reports appear to show that the gap is actually around 14.1%, and as little as 5% for people in their 20s. While much of the data is not yet available it is worth taking stock of what we know. One council I have worked with is reporting a gap of just under 8%, much of which is explained by the preponderance of women in the lower-paid/lower-skilled roles. In contrast, one Schools Academy Trust has reported a gender pay gap of a shocking 62%, and two councils in the South-East are reporting a gap of over 30%. One wonders how this can be explained when the nature of the workforces are broadly similar. Compare this with the financial sector, which has been previously berated for its attitudes towards women showing an average gap of 26.3%.

Conclusions and comment

To start let’s revisit the facts as we know them.

  • Average public sector pay is said to be around £5000 more than private sector pay, if we take into account pensions.

  • Lower skilled roles are generally better paid in the public sector than the private sector.

  • Productivity in the public sector has been growing at 0.5% per year for the last six years and is set to continue (while the private sector appears to be on the downturn).

  • The Government’s deficit target is set to reduce to 2% of GDP by 2020/21, but this is dependent on continued control of public spending.

  • Much of the public sector workforce has seen a cut in pay in real terms over the last decade, although the size of the cut is somewhat disputed.

  • The two-year local government pay award will cost councils 5.6% over the next two years.

  • The estimated cost of the NLW to 2020 is £1.4 billion, covering a quarter of the workforce.

  • The NLW will have a disproportionate impact on growing public services, such as social care, squeezing differentials and putting pressure on already stretched budgets.

  • Women’s pay still lags behind men’s pay with gaps averaging 14.1%.

  • The gaps in gender pay vary significantly with many councils reporting small gaps (2%), but some outliers at over 30%.

As previously stated in this article this could lead to a need for a differentiated approach to public sector pay. There are wide disparities in recruitment and retention issues in different roles and across different parts of the country. Nationally set pay makes it difficult to respond flexibly to changes in markets and sectors. There are arguments that public sector pay awards should be appropriately funded and even the CBI acknowledges that there should be better funding for social care arrangements, particularly to cater for the ageing population. The counter arguments are that pay awards should be self-funding through increased productivity and efficiency. Anecdotal evidence shows that pay does not drive efficiency, and it is the reduction in budgets, which has necessitated and driven the impetus to innovate and change. Increasing concerns around the public sector’s ability to attract and retain skilled staff has led to a greater emphasis on total reward, with local authorities finding more imaginative ways of rewarding and recognising their employee’s contribution. Given the disparity of issues across the country in relation to recruitment and retention there could be an argument for more localised arrangements for pay. However, the author has observed that those public sector employers who have elected to have local pay arrangements appear to exhibit larger gaps in gender pay.

It is a well-known fact that most people do not enter public service for the money, but for the satisfaction of their job and a belief in public services. However, the perception of pay plays significantly into how employees feel about their work and its value and the public’s view of the services they provide. It is time for a long hard look at how we fund our public services and consequently fund pay arrangements that are flexible enough to meet the needs of markets and sectors, but also ensure that the division in gender pay is not exacerbated. I have a sense that this debate will run for some time.

Author

Tricia Palmer is a consultant in HR, interim director and leadership trainer. She is a regular contributor to Croner-i for local government.