Alastair Hatchett IDS Head of Pay and HR Services and Ken Mulkearn Editor, IDS Pay Report Capital Ambition pay seminar 8 December 2010 Pay prospects in the public sector 2011/12

Private sector recession: public sector austerity? There is an urban myth that all pay in the private sector was frozen in 2009 and that many employees accepted pay cuts This view became widely accepted among politicians and media It became the basis of public policy with calls for pay freezes, first from Labour and then from the Conservatives The recession led to pay freezes, smaller City bonuses, short- time working in the car industry, loss of overtime and shift pay, unpaid leave and smaller variable bonuses 2

Pay in 2009: a spectrum of experiences Sectors prone to freezes Sectors mostly freeze- free Cars and components Energy/utility companies Engineering Finance Road/air transport Rail transport Construction Aerospace and defence Bulk chemicals Pharmaceuticals Media Retailing/supermarkets 3

Pay trends from recession to recovery 4

Current picture on pay awards 5

Key observations from IDS pay research Most private sector companies had a pay rise in each of 2009 and 2010 Around 7% of companies had a double-year pay freeze Pay freezes were largely about retaining skills/staff for the upturn Earnings lower from smaller bonuses in all sectors Earnings lower from reduced hours of work, but basic pay tended to be protected Media generalised from short-time working in the car industry to suggest short-time and cuts almost universal in the private sector Pay cuts very rare (3% pay cut at Honda was temporary) 6

2009 and 2010: a matched sample analysis 7

Pay and earning: when is a freeze not a freeze? Basic pay frozen, but bonus paid Basic pay rises, but bonus not paid Paybill frozen, but certain groups allowed market pay moves funded by staff turnover One company told IDS: pay review 0%, but off-cycle costs high Pay frozen above a threshold but flat-rate rises paid below the threshold eg BBC offers flat-rate £475 for those below £37,726pa Basic pay frozen, but progression pay continues The length of a freeze can be retrospectively shortened by backdating the next pay rise by 3 months eg BT in

Public sector pay developments : prior to Coalition Increasingly tight Treasury limits 2.5 > 2 > 1.5 > 1 > 0% Long-term deals with below RPI rises (2.3/2.5%) End of comparability with private sector Changed remit to Review Bodies to stress affordability and CPI inflation target Arguments over progression pay in civil service and PRBs In 2009/10, review bodies constrained by 0 to 1% Media says public sector employees feather bedded with gold plated pensions Median public sector pay rise in 2009/10 2%, same as private sector 9

Average Weekly Earnings by sector 10

AWE whole economy: total pay and regular pay 11

AWE for public and private sectors 12

Economic forecasts for 2010/11 GDP to end 2010 at 1.7% and end 2011 at 1.8% RPI to end 2010 at 4.3% and end 2011 at 3.5% CPI to end 2010 at 3.0% and end 2011 at 2.6% Claimant unemployment 1.50m Q410, 1.64m Q411 Average earnings: 2.3% end 2010, 2.5% end 2011 Source: independent forecasts (Treasury, 17 November 2010) 13

Retail Price Index vs Consumer Prices Index Government promotes CPI as THE inflation measure Royal Statistical Society says CPI should not have sole star billing in this way The CPI should have a housing element Reform of CPI required if it is to be used to uprate benefits Most EU countries have a domestic inflation measure (such as the RPI) and then publish CPI (HICP) as a secondary index RSS protest sent to UK Statistics Authority Bank of England tracks CPI but privately dislikes the index. 14

Public sector pay in 2010 Labour freezes come into effect, prior to Coalition freezes Third stages of 3-year deals paid 2.25 to 2.55% (NHS, Teachers, police) also HMRC 1% and MOD 0% but 3.37% on paybill Freezes in Local government, doctors and dentists, SCS groups University employers offer 0.4% (Settled for 0.5% in 2009) Scottish Councils 3-yr deal: 0.65% from April 2010, then 2-yr freeze and no underpinning below £21K First groups negotiate on rises for £250 increases for those earning below £21,000:DWP offers £400 for AA grades, £465 in AO, and £540 for EOs NHS says intends to reduce reliance on agency staff 15

Public sector pay in 2011 Main force of pay freeze policy to be in place Lots of variations in approach to rises for low paid, below £21K Variation in approach to whether progression to be paid Is it a paybill freeze or a 0% review increase, plus adjustments A return to market supplements? Will local government follow coalition policy and pay underpinning increases? 16

Treatment of employees earning £21,000 or less Should be based on basic salary Part-time workers with an FTE less than £21K should get pro rata increase £21K should not include O/T or London weighting or market premiums The size of the uplift should be determined by employers, to be of at least £250, bearing in mind The level of progression Affordability How best to avoid leapfrogging those earning just under £21K or those just over £21K by using a taper 17

The Huttons Will Huttons inquiry into Fair pay Would fixed ratios work 20 fold ratio on £14,000 = £280,000 Would catch very few people John Hutton on public sector pensions Higher contributions and later retirement dates Career-average pensions? Hutton: Public sector pensions not gold plated Local government scheme funded, whereas other not 18

Public sector pay in 2012 Pay still frozen? Pay reform promised for police and teachers Pay reform expected in civil service The future of independent pay review bodies Retention of national pay bargaining Gender pay gap widens 19

How much will public servants standard of living fall back? RPI inflation in % RPI inflation in % Pension contributions to rise by c.3% Pay freeze, but progression paid = 1% Pay freeze, but progression is frozen = 0% Pay rises of 2% or more for those earning below £21,000 Meanwhile private sector pay set to rise by 3% in 2011 and

The gender pay gap: macro and micro changes Gender pay gap narrows in April 2009 under impact of lower male earnings: from lower City bonuses and lower manufacturing earnings Gender gap likely to widen in 2010 as male earnings bounce back from recession impact in Spring 2009 Public sector pay freezes in 2010, 2011 and 2012 will hit womens earnings as public sector employment around two- thirds women (around 80% in NHS, and 75% in teaching and local government) So gender pay gap likely to widen over next three years because of macro-economic and government policies Despite any micro level developments within companies 21