1. Pay and Benefits

1a.) Pensions

The biggest difference between compensation packages in the public and private sectors – bearing in mind that there are material differences between different parts of the public sector – is undoubtedly pensions. The scale of this differential, however, is not widely known. Final salary, defined-benefit pension schemes continue to be enjoyed by the vast majority of public sector employees (82%), but are now very rare in the private sector (8%). They are practically non-existent in the SME sphere, where many are dependent on the woefully inadequate auto-enrolment schemes, whereby employees contribute 5% and employers 3% of salary to build up a fund, subject to market fluctuations and no guaranteed pension.

In contrast, the Government, through the largesse of those very same working taxpayers, contributes, for example, ten times this amount – 30% – to the pensions to be enjoyed by civil servants. Even this figure is an actuarial estimate only as those civil servants are guaranteed, firstly, that their pensions will equate to a fixed percentage of their final salary, and secondly, that on completion of service the pension entitlement accruing to them will be forever linked to increases in the RPI, both advantages totally divorced from and not dependent on any underlying investment performance. Whilst a mid-ranking civil servant with a number of years’ service might reasonably expect to accrue a pension of up to £20,000, someone in the private sector wanting to enjoy a similar index-linked pension with significant widow benefits would probably need to accumulate a fund of c£670,000 from their own investments to purchase an annuity to replicate that.

1b.) Taxation of Pensions

There is always much coverage in the press of the lifetime allowance and how this has been restricted over the last decade particularly, meaning that punitive tax rates apply to withdrawals from funds exceeding that level. However, what is not often covered is the hugely beneficial tax treatment enjoyed by those on final salary arrangements, and therefore mostly those in the public sector. For example someone in the private sector can only have up to c£1million in their pension fund, which could purchase an index-linked annuity pension of c£30,000, before suffering those punitive rates, however, a final salary pension is deemed to be dependent on a fund at a notional multiple of 20, such that they can enjoy a pension 66% higher, of £50,000, before they face those same tax rates.

1c.) Retirement age

Even as the state pension age continues to increase to reflect improved life expectancy, there are nevertheless still many in the public sector, notably those in the police and fire services, who are able to retire in their 50s, if with reduced benefits. This is simply not an affordable option for the vast majority of people in the private sector (perhaps with the exception of Premier League football players), regardless of how physically active your role is deemed to be. Again, to save the value of a reasonable index-linked pension payable from the age of 50 as an equivalent annuity fund is yet further beyond the reach of the vast majority in the SME private sector.

 1d.) Salaries

Historically, it used to be the case that salaries were lower in the public sector to give some recognition to this huge differential in pension benefits together with many of the factors I will address below. However, a cursory look at the adverts you see for jobs now, particularly in the civil service and in head office roles in local councils, shows this is no longer the case, even when you look purely at the monetary amounts quoted, ie before other benefits.

1e.) Pay increases/banding levels

When public sector unions are offered percentage-based rises, they always compare them to both (overall) private sector rises and inflation. However, in many parts of the state sector, particularly, again, in the civil service, these rises apply to bandings for each pay grade. This means that good staff can – quite rightly – enjoy much higher rises than the quoted overall by gaining promotions through the grades but that this makes simple comparisons very misleading.

1f.) Bonuses – performance

In the private sector, bonuses are typically limited to very senior management/director levels and sales staff, and are very performance-oriented, whilst in the public sector, it is often reported that these have benefited wider staff groupings, and seem to be getting paid in parts of the public sector where backlogs and other under-performance issues have been extensively reported on in the press.

1g.) Flexi time

This is a benefit almost totally phased out in the private sector, however, even relatively senior roles in the public sector, i.e. those on salaries of £50,000, are still entitled to take time off in lieu if they have cause to work hours in excess of their contractual commitment.

1h.) Holidays

Staff in SMEs will still often only have the statutory minimum holiday allowance of 20 days plus bank holidays. With many public sector employees, this can be 25 days and even 30 days in similar office-based jobs.

1i.) Maternity / Paternity Leave

Full pay is only government-funded for a period of six weeks, whilst employees taking extended maternity leave impose additional costs on SMEs, given the obligation to continue to fund benefits including auto enrolment pension contributions and the requirement to accept that holidays continue to be accrued whilst staff are on that leave. Against that backdrop, very many SMEs cannot afford to provide any extra entitlements beyond the six weeks and the further 26 weeks at statutory minimum level. Many public sector employees are entitled to much more generous leave where full pay is left in place for longer, then phased down.

1j.) Sick Leave

Many SMEs do not offer any pay for time off sick beyond the minimal statutory level, whereas public sector employees are again entitled to full pay which can stay in place for several months before reducing gradually.

1k.) Working from home

Many private sector employers know, and have publicly stated, that they believe productivity to be lower for staff working from home and therefore many initiatives have been launched and threats issued to ensure staff spend more time in the office. It is well documented how, particularly in the civil service, this has been resisted and staff continue to enjoy much more flexibility than many of their private sector colleagues.

1l.) Secondments/transfers

Particularly in the civil service, staff often need to seek transfers to other departments to be able to rise through the grades, thus removing appropriate experience from teams/departments that need it, meaning that those transfers often seem to be purely for the benefit of the employee rather than the civil service overall. Such a luxury is rarely available in SMEs.

1m.) Trade union protection

Only 12% of employees in the private sector are members of a trade union, which compares to 49% in the public sector, and this undoubtedly has a consequential effect on job security, pay rises and protection of other benefits.

2. Additional benefits for those employed at a senior level in the Public Sector

For senior positions, there are a number of less tangible benefits. If a senior employee does happen to fail in a particular role, there always seems to be a very generous redundancy package to soften the blow, often then to be followed by a ready-made conveyor belt to transport that person into a similar role for a different department or authority as well as opening up further lucrative part-time non-exec roles.

3. Why do many low-paid private sector employees support strikes?

The public sector employs 5.9 million and the private sector 27.2 million people, of which 16.7 million work in small businesses (less than 50 employees), so the 16.7 million represent c50% of total employment.

In the UK there is often to be found a deep resentment of successful high-earners in the private sector. The same jealousy does not seem to hold for those in the sporting and arts sectors, but equally, salaries in the public sector also do not appear to attract the same condemnation or bitterness. If it were more widely known quite how large the gulf is between benefit packages in the two sectors, there might be less tolerance for generous benefit packages in the public sector.

4. Why does this matter and what could be achieved?

My objective here is not to indulge in the “politics of envy”, and I absolutely understand that if one were to confront a public sector trade union leader with these facts, the response would be, as we often do hear, that we should not indulge in a “race to the bottom” and that private sector workers should aspire to lift their overall packages towards that of the public sector, rather than reduce the latter. This argument however simply does not stand up to any level of serious scrutiny, given both that taxes are higher to pay for these public sector benefits, and that many SMEs would simply not continue to operate if they were compelled to offer public sector level packages to their employees. There is also often mention in the media of the size of the UK’s c£2.7 trillion debt levels, however the £1.3 trillion of unfunded public sector pension liabilities should surely attract more attention, given the pressures this will add to future taxpayers.

It is essential to have a proper grown-up debate and appreciation of the fundamentals, specifically:

• I truly believe that those working in the public sector might benefit from improved morale and may well be less inclined to strike if they had a proper understanding of quite how generous their pay and benefits were compared to colleagues in the private sector.

• The continuing misinformation also affects recruitment to the public sector where, for example, there have been reports in the press about school leavers being put off going to medical school because they truly believe junior doctors are paid less than baristas.

• It of course cannot be denied that many public sector workers will be struggling through the cost of living pressures, however, an enhanced appreciation of the value of those packages should open up more areas in which a meaningful negotiation can be had about trade-offs between government and trade union leaders, for example that a higher annual wage settlement might be made, but that this would be at the cost of, say, a diminution in future pension guarantees.

• It might well be argued that the fairest solution would be to make this trade-off, ie higher salary in exchange for a move to a defined contribution pension scheme, compulsory for new entrants and to make a switch for existing employees, where accrued pension rights would be honoured and retained, but future employment would involve contributing to a defined contribution pension from an enhanced base salary.

• If there was greater transparency about the generosity of benefit packages in the public sector, private sector employees would presumably be less inclined to support public sector strikes. This would give governments of whatever stripe the legitimacy to resolve the underlying disputes in a way that is fairer to taxpayers.

• Governments should be forced to be more open about the long-term impacts on the country’s debt and on whom that will fall if there is no serious attempt at reform.

• On the other hand, if and when these differences do become better understood then, if unaddressed, the logical conclusion for the brightest graduates and school leavers to draw is that they should seek employment in that public sector, but such a crowding-out of talent from the private sector would make it even more difficult for tax revenues from the private sector to fund that public sector.

 

Recommended further reading:

• The Great British Rake-Off. How the government has misled Parliament and the British people on public sector pensions | Neil Record | IEA Discussion Paper No.103


• Sir Humphrey’s Legacy: An Update. UK Public Sector Unfunded Occupational Pensions | Neil Record | Current Controversies No. 27