Pay comparisons between public and private sector workers ignore the value of employer-provided pensions. This is an important omission because, on average, these pensions are more valuable in the public sector than in the private sector and, furthermore, over time this relative difference in value has changed considerably. In the public sector, coverage has been stable over the last 15 years with most employees being members of a defined benefit (DB) pension.
From 1997 to 2009, the average net pension accrual in the public sector rose. In contrast, it fell significantly in the private sector, particularly because many private sector DB pensions were closed to new entrants. As a result, the change in the public sector pay differential underestimates the increase in the differential in remuneration over this period. As measured by pay only, the public sector differential fell from 7.1% in 1997, fluctuated between 1% and 4% in the 2000s, reaching 3.1% in 2009. Including (RPI-linked) pensions, the differential rose from 17.9% in 1997 to 22.3% in 2009.
From 2010 onwards, the value of pensions in the public sector has been reduced, primarily because of the decision to CPI-index both deferred pensions and pensions-in-payment. Combined with increases to employee contributions in 2012, this means from 2009 to 2012, the public sector differential including pensions fell from 22.3% to 16.8%, compared to an increase from 3.1% to 4.6% for pay only.
It is, as yet, not fully clear what the effect of some of the more recent reforms will be on the public sector remuneration differential over the next few years. One important influence will be the reforms implemented as a result of Lord Hutton’s review (reducing the future accrual of pensions among those who still have an NPA of 60 but reach their NPA after 2025, but having relatively little change, on average, among those who already have an NPA of 65). In addition, auto-enrolment should lead to an increase in pension membership among private sector employees and will likely lead to an increase in the value of their DC pensions. However, because most private sector DB pension schemes are closed to new entrants, the trend in falling numbers with DB pensions continues.