Budget 2010: Reforms to public sector pensions and pay

The 2010 Budget included measures to reform public sector pensions and control public sector pay, including confirmation of a 1% cap on basic pay uplifts for 2011-12 and 2012-13.

Chancellor Alastair Darling said: “There will be reductions in the pay bill for senior civil servants. Overall, we intend that public pay settlements will be held at a maximum of 1% for the two years from 2011.”

The government has said it is committed to continuing to provide sustainable defined benefit (DB) pensions. As part of this, cap and share provisions will be implemented for teachers, civil service, NHS and local government pension schemes.

These provisions will cap the contribution to pensions made by employers, thereby limiting the liability of the taxpayer as pensions become more valuable.

Tim Middleton, technical consultant at the Pensions Management Institute, said: “We are not persuaded that this move will in itself provide a long-term solution to the burgeoning costs of public sector pension provision. If defined benefit provision is to be retained within the public sector, it will be necessary to implement drastic changes to scheme design.”

Additionally, the Budget has introduced a new Code of Practice on setting pay for senior public sector workers, following the pay freeze for these workers in 2010-11.

The government is accepting the results of the Senior Salaries Review Body (SSRB) review of senior pay in the public sector. This recommends greater use of independent Remuneration Committees, which will include ‘taxpayer champions’ and escalation of decisions to ministers, or audit and regulatory bodies, where there is a proposal to pay above agreed norms.

The government is asking all public sector organisations to explain, publicly, how they will comply with the code by the end of the year, and working with the SSRB, will consult on detailed implementation of the code’s provisions.

Chris Johnson, UK head of human capital business at Mercer, said: “The government’s move on public sector pay is to be welcomed, but the public sector missed a real opportunity last year to freeze pay increases when 60% of commercial employers were doing just that.

“In 2010 we are seeing fewer employers freeze pay though almost all employers continue to contain pay increases. The more critical challenge is for the public sector to move away from rigid, incremental and inflationary pay structures to ones that are more flexible and closely linked with how public servants perform.”

Projected savings following the cost reduction in public sector pensions and pay is more than £4bn.

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