There is a good case for restructuring public sector remuneration and carefully rebalancing it away from pensions and towards pay, new research reveals.
The research from Institute for Fiscal Studies (IFS) was published as part of the IFS Green Budget - which aims to provide in-depth analysis of the challenges and trade-offs facing the Chancellor ahead of the Budget - and funded by the Nuffield Foundation and produced with Citi. The data finds that public sector pensions remain extremely valuable relative to private sector comparators.
However, many lower earners opt out to avoid the relatively high employee contributions needed to participate. Among workers in the public sector, 13% of those earning £10,000 to £16,000 a year opt out of their pension scheme, more than twice the rate among those earning more than £31,000 per year (6%).
In addition, the research finds:
• Higher-paid public sector workers have fallen down the overall earnings distribution in the past 15 years. The pay of the average doctor has slipped from the 95th percentile of the hourly pay distribution in 2007 to close to the 90th percentile in 2023.
• The NHS has not experienced a worsening in recruitment or retention compared with pre-pandemic, but vacancy rates for nurses and midwives remain high (8%). The increasing dependence on international recruitment to fill NHS roles, a pattern which, at least in the judgement of the Pay Review Body, opens additional retention risks compared with
filling roles locally. The report also criticises high agency staff use – which is one response to failing to fill roles – as being expensive and inefficient. While use of agency staff has fallen in England since 2015, it continues to rise dramatically in Wales and Northern Ireland.
• Increasing public sector pay in line with forecast average earnings growth could add around £6bn per year in real terms to the pay bill by 2028–29. Closing the gap that has opened up between public and private sector workers since 2019 could result in a pay bill £17bn higher than today. Increasing the size of the workforce – as may be required to deliver service improvements – would cost even more.
Andrew McKendrick, a research economist at the Institute for Fiscal Studies and an author of the report, said: ‘There continue to be big geographical differences in how well public sector pay compares with private sector pay. Public sector pensions remain far more valuable than those in the private sector, but significant numbers of lower-paid staff miss out as they cannot afford to make the required employee contributions.
‘Gaps in pay between the two sectors are often bigger, and recruitment problems worse, for higher-paid groups such as judges and senior civil servants. Government needs to structure remuneration to make sure it is getting the right people in the right roles to help deliver public services. That might mean carefully rebalancing away from pensions and also towards higher-paid professions.'
