A Potential Trade-off for Stability and Sustainability

A Potential Trade-off

The UK government is reportedly considering a plan to offer higher wages to public sector workers in exchange for lower pensions. This move could potentially help avoid future strikes over pay and retain staff, who are expensive to replace. However, the proposal has caused unease among some unions, who view it as a "dangerous" idea.

Ministers have not yet made any decisions on the proposal, but it has received backing from Lord O'Donnell, the former cabinet secretary. He argues that it would be a "win-win" reform, saving the exchequer money and making sense for civil servants as they could use the upfront money to secure a mortgage.

Former chancellors have been skeptical of the idea, but Lord O'Donnell believes that an "economically literate chancellor" would understand its benefits for public finances.

The public sector has faced waves of strikes in recent years due to pay disputes. While these have been resolved in the short term, problems remain. A significant number of new teachers quit within five years of qualifying, and the NHS struggles to fill over 100,000 vacancies.

Ministers have recommended a 2.8% pay rise for millions of public sector workers next year, but this has led to threats of further strikes.

Cat Little, the permanent secretary at the Cabinet Office, is reviewing the balance between pay and pensions and has begun discussions about offering staff more flexibility.

Sir Steve Webb, a former pensions minister, believes there is a debate to be had about the right balance between pay and pensions for public sector workers.

Currently, most public sector pension schemes are not separate funds but are paid from present tax receipts. This means that a significant portion of council tax revenue is spent on staff pensions.

Mr. Webb warns that while a trade-off between pay and pensions might be theoretically cost-neutral for the government, it would simply bring forward costs. Since there is no money set aside for the pensions of current public sector workers, any savings in pension costs would not occur until they retire. In contrast, the extra cost of higher wages would be immediate. This makes the idea less appealing to the Treasury, which generally prefers to push costs into the future.

The government has stated that its focus is on supporting the civil service with the tools it needs to deliver change for working people.