Outlook for pay, including senior pay 2008-2010

Report: 6
Date: 26 June 2008
By: the Chief Executive

Summary

At the beginning of January 2008, the Prime Minister and the Chancellor of the Exchequer announced plans to introduce three year pay deals for all public sector workers. They argued that such an approach would be essential in controlling inflation, whilst providing certainty for public sector workers. The difficulty the Government faces in the police service, and for police staff in the Metropolitan Police Service (MPS) is that last year’s negotiations have damaged employee relations. This paper looks at some of the influences on public sector pay, including senior pay, over the next three years.

A. Recommendations

Members are asked to note the report.

B. Supporting information

1. Although the Government has announced plans to introduce three-year pay deals for public sector workers, it is difficult to clearly set out how this fits within an over-arching policy, as there is no single statement where such a policy on public sector pay is set out. From the various statements made in evidence to Pay Review Bodies, in pre-Budget and Budget statements and in published letters to the Chairs of the various Pay Review Bodies, the approach can be summarised as follows:

• Pay increases must be affordable and consistent with the inflation target (2%)
• Increases must be sufficient to recruit, retain and motivate staff and to deliver high quality services
• Pay and progression should be reformed to keep more of the skilled staff in front line roles and should be linked to performance
• ‘Modernisation’ of pay systems should be encouraged
• Local pay flexibility and regional pay should be examined
• More focus should be given on total reward, with greater awareness of pension benefits

2. This report endeavours to draw together a range of material, including the approach the Association of Police Authorities (APA), the Association of Chief Police Officers (ACPO) and the Home Office are jointly taking on pay modernisation (Police pay structures reform – paper to National Policing Board (March 2008) for police officers, including senior police officers. They have a broad consensus:

• That there is a need to look at reward and benefits in the round; pay structures should not be considered in isolation
• That any arrangements should encourage (or at least not discourage) collaborative working within and between forces and external partners
• That whilst effective recruitment and retention was not surprisingly identified as a key aim it was important that this was not just about numbers but about attracting and retaining the right people with the right skills. For example whether there is scope within a pay scale or rank to reflect different levels of responsibility, to encourage and support skills development or take account of performance and contribution.

Government’s considerations in respect of public sector pay

Pay increases must be affordable and consistent with the inflation target (2%)

3. The all-items Retail Price Index (RPI) is the measure of inflation most commonly used by employee pay negotiators and it is also used by the Government to index pension payments and other state benefits. This is because it covers the full range of goods and services purchased by the majority of households, i.e. it covers essential items such as food, housing costs and heating, and also discretionary items like audio-visual products. However, the Government prefers the Consumer Price Index (CPI) as a ‘better’ measure of the genuine increase in the cost of living because it allows for the possibility of changing spend patterns in the face of price rises.

4. The Government has argued that ‘above average’ pay increases in the public sector contribute to increased levels of inflation and that its inflation target is not negotiable. However, according to the Office of National Statistics (ONS), inflation has been driven by increased petrol and oil price rises, household goods and transport costs.

5. For employers, the Government’s use of public sector pay as a tool to promote lower inflation may come at a price, since an increasing public/private pay differential will attract the best staff and potential recruits to the private sector.

6. Nevertheless, the Government has acknowledged that aspiring to keep public sector pay settlements consistent with the 2% inflation target is not the same as saying that pay increases should be kept to 2%. The Bank of England have said that economy-wide earnings growth of around 4.5% could be consistent with its inflation target, e.g. if productivity is growing by 2.5% per annum, then 2.5% pay growth would simply reflect the greater productivity of workers in the economy and be consistent with zero inflation. By the same token, pay growth across the public sector of around 4.5% should be entirely consistent with the inflation target of 2% if there was 2.5% increased productivity.

7. A recent manifestation of this approach was Ed Balls (Schools Secretary) who accepted the proposals of the School Teachers’ Review Body for a three year pay deal for teachers and head teachers worth 2.45% in 2008 and 2.3% in 2009 and 2010. He said that it was "consistent with the achievement of the CPI inflation target of 2%," "value for money for taxpayers," and reflected the labour market position of the workforce.

Increases must be sufficient to recruit, retain and motivate staff and to deliver high quality services

8. Assessing whether public sector pay is at the ‘right’ level is a very difficult task. Public sector labour markets are not competitive since employees often are the sole providers of indispensable services, whilst the public sector is often the sole or major employer of the specific skills of their employees, e.g. policing,

9. Similarly, as public sector productivity has not been increasing significantly in recent years this might lend credence to the view that the ‘right’ level of public pay increase should be as low as possible. However, in the long run below inflation increases has fed discontent amongst many public sector employees after a period in which earnings have been growing as a result of pay modernisation / restructuring, equal pay and recruitment and retention initiatives. For example, there have been substantial increases to London allowances for police officers, followed by ‘cost of living supplements’ for nurses, and a new ‘upper pay scale’ for experienced teachers, all measures aimed at recruiting and retaining staff, which in most cases were successful.

10. More recently job losses across the civil service, tightening financial budgets and limits on recruitment, e.g. in the National Health Service (NHS), mean that public sector workforce numbers are falling, in contrast to the growth between 1999 and 2005.

11. The current Government approach to pay is likely to widen the gap between public sector pay settlements (and earnings growth) and those in the private sector. The context for pay bargaining in 2008 is (currently) a relatively strong economy, RPI inflation remaining at a high level and a strong labour market with employment at record levels. In this context Income Data Services (IDS) anticipate that private sector pay settlements will be between 3.5 - 4 per cent.

Pay and progression should be reformed to keep more of the skilled staff in front line roles and should be linked to performance

12. The APA, ACPO and Home Office want to see reward systems which:

• could encourage and support skills development.
  For example, linking progression to the attainment and application of accredited skills. Further work on this area could therefore include consideration of what skills are required for 21st century policing and how are they obtained and maintained. This would need to take account of the work of the NPIA on for example PDRs, competencies and current and planned development programmes and strategies.
• reflect more appropriately the particular roles undertaken by officers and staff.
  For example, is there scope within a pay scale or rank to reflect different levels of responsibility; how such an approach could help recognise the wide range of roles undertaken in the service including the outcomes of workforce modernisation and issues of fairness / consistency;
• could take account of performance and contribution.
  Currently superintending and chief officer ranks have provision for progression based on PDRs and access to performance bonuses. Further work on this area could therefore examine the arrangements for measuring and evaluating performance at service, business and individual level.

Modernisation of pay systems should be encouraged

13. There appears to be little, if any, focus or analysis on the benefits resulting from the pay modernisation that has been introduced over the past five years in most parts of the public sector. On the contrary, one interpretation is that pay modernisation has been a cost rather than an opportunity, e.g. in the NHS.

14.  The NHS “Agenda for change” programme meant that between 1997 and 2006, doctors and nurses saw their earnings increase by 60% and 56% respectively; teachers, civil servants and prison officers have been below the public average of 47% earnings growth and the armed forces and police are closer to the public average.

15. Many public sector groups are covered by Pay Review Bodies (PRB) who make recommendations to government, many of which have incorporated ‘modernisation’ proposals. However, the government is now taking an increasingly tougher stance on these recommendations, e.g. since 1999 it has ‘staged’ the recommendations from pay reviews or arbitration tribunals on only seven out of forty nine occasions but four of those occasions – affecting judges, prison officers, nurses and the police – were in 2007. In each case the government chose to ‘stage’ the awards in order to limit overall headline awards for predominantly PRB groups in 2007–08 to below 2%.

16. Given the purpose of PRBs is to provide independent advice in respect of groups of workers who have either foregone the right to strike or with whom government finds it ‘difficult’ to negotiate directly, this is a precarious course of action and may undermine the pay review / arbitration process.
6.5 In response to Sir Clive Booth’s review of police pay negotiating machinery, the government has accepted that a PRB for police officers, including chief officers, should be created. They have agreed that “in the near future” they will consult on proposals for implementing the necessary changes to the police pay machinery.

 Local pay flexibility and regional pay should be examined

17. The pattern of regional pay appears to differ between the public and private sectors. For example, data from the Institute for Fiscal Studies (IFS) suggests graduates in the public sector earn significantly less in London and the south east than their private sector counterparts. In Northern Ireland, the North East and Wales, the opposite is true.

18. More specifically in the public sector, the median male teacher in London is at the 40th percentile of the male graduate earnings distribution, whereas his counterpart in the North East is at the 50th percentile of the equivalent distribution and his counterpart in Northern Ireland is at the 60th percentile. With a constrained budget and limited scope to increase wages across the board, there is a strong argument for raising wage differentials across the country, e.g. with an overall increase of 2.5%-3.0% the following increases could be provided:

• 2.5%-2.8% where teachers’ pay is highest relative to the private sector
• 3.0% where teachers’ pay is in the ‘middle’ group
• 3.2%-3.5% in the south-east where teachers’ pay is relatively low compared to the private sector
• 3.9%-5.4% in London where teachers’ pay is lowest compared to the private sector

19. Arguably, the fact that the Scottish and Welsh administrations accepted pay review body recommendations in full for nurses and police rather than ‘staging’ them meant that the effective increases were higher in Scotland and Wales than in the more constrained labour markets of London and the South East. This ‘regionalisation’ approach to pay is a step away from across the board increases – albeit in the wrong direction.

More focus on total reward, with greater awareness of pension benefits

20. However, there are also differences between sectors in the value of pension accruals. A recent estimate by Disney, Emmerson and Tetlow in ‘What is a public sector pension worth?’ (2007) suggest that the average value of the accrual of pension rights for public sector employees is around 25% of salary. In other words, the additional pension accrued for one more year in employment is on average worth a quarter of gross salary. So an average public sector employee who is a member of the pension scheme with a headline salary of £20,000 would have a remuneration package including pension worth not £20,000 but £25,000.

21. Private sector scheme members have a slightly lower accrual of about 20%, so that the scheme member on £20,000 would have a pay and pensions’ remuneration package valued at £24,000. The main reason for this difference is the lower pension age in most public sector schemes (generally 60, as against 65 in most private schemes).

Implications for the Metropolitan Police Service (MPS)

22. For police officers, the outcome of the Police Federation judicial review of the ‘staging’ decision is awaited. Regretably the furore over this issue obscured the broad acceptance by the arbitration tribunal of the Official Side’s arguments. The isssue of Chief Officers’ pay, which has gone to arbitration over a claim seeking further pay increases since 2006, is also awaited. Whatever the outcome, a second year of lengthy negotiations and the imposition of a ‘staged’ award by the Home Secretary will undoubtedly make discussions of three-year pay deals or PRB arrangements much more difficult.

23. For MPS police staff – including senior staff - the likelihood is that the disagreements between the four unions for the last three years will continue. The 2007 pay negotiations have further exacerbated both this relationship and the relationship between employers and staff. The re-opening of pay negotiations with the Public and Commercial Services (PCS) union and the imposition of the revised pay award particularly upset the Prospect and Unite unions.

24. The 2008 pay negotiations will also be difficult, with the unions apparently unwilling to discuss modernisation and unlikely to want to discuss three-year pay deals. For their part, the unions appear ready to re-submit elements from the 2007 claim including:

• RPI increase or better
• Further increases to London Weighting
• Harmonisation of terms and conditions

25. In addition, PCS have added “Political campaigning including work with the Greater London Assembly and MPA on the ring fencing of police staff pay so that in future underspends cannot be redirected into other parts of the MPS budget.”

26. For senior police staff, the First Division Association (FDA) have raised their concerns about the lack of genuine negotiation and below inflation pay increases, i.e. 1.5% in 2007, for satisfactory (Box 3) performance. The MPS have consistently argued that senior pay is falling behind comparable groups of senior staff in other sectors; the MPA contends that current pay rates are competitive and the going rate for the job. Arguably the low level of turnover amongst this group of staff would support this, although the MPS will point to the difficulties in recruiting for some niche or specialist roles, e.g. in the Directorate of Information.

27. It is proposed to hold a meeting in mid June prior to the formal commencement of pay negotiations in order to ‘set the scene.’ In other words, for the employers to provide a full explanation of the approach being adopted by Government and the implications for police staff pay over the next three years. The Trade Union Side (TUS) will also have the opportunity to set out their thinking for the forthcoming pay negotiations. At a similar meeting last year, the MPS pay negotiating team were joined by the Director of Finance, the MPA Treasurer and MPA HR Policy Officer. An invitation has been extended to the same group for this year.

C. Race and equality impact

Pay and appraisal schemes must be carried out fairly and objectively for all staff, irrespective of race, gender, disability, faith or belief, sexual orientation, age or any other irrelevant factor. It is the responsibility of the police authority to ensure that arrangements are in place to monitor the operation of these systems and to take action if these requirements are not being followed. The MPA must ensure that, for ACPO ranks and senior police staff, there is sufficient management information to enable effective monitoring to take place and to provide information to the PNB who will review the operation of these arrangements.

D. Financial implications

The police pay negotiations will take place at PNB. The police staff negotiations will be confined to the MPS. Both will need to be consistent with the Government’s approach set out in paragraph 1.

E. Background papers

None

F. Contact details

Report author: Alan Johnson, Policy Officer, Human Resources, Metropolitan Police Authority (MPA)

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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