Why top civil servants may soon be tempted to trade in their gold-plated pensions

Rachel Reeves faces calls to take radical action to stem the flow of public sector departures

Britain’s public sector has a retention problem – and an expensive one at that. 
One in four senior civil servants are switching jobs or leaving each year, while the teacher vacancy rate has doubled since the pandemic. 
In an attempt to stem the flow of departures, Chancellor Rachel Reeves has handed out £9.4bn worth of taxpayer-backed pay rises. 
However, experts believe there could be another lever to pull to tackle the problem, albeit one that has long been considered sacrosanct. 
Calls are mounting for Ms Reeves to draw funds away from the public sector’s extremely generous pension pots and use them to increase salaries. 
“Public sector pensions are massively out of line with what is available in the private sector and public sector pay has been held down a lot relative to the private sector,” IFS director Paul Johnson said at a fringe event at the Conservative Party Conference.
“It would make sense, I think, to try and rebalance that so that there is more impact in the way of pay and less in the way of pensions.”
Such a solution would bolster earnings across the public sector, although many believe it would strengthen the Government’s hand at the top end of the pay scale. 
“There’s a number of people, especially at the higher end, coming into the civil service who would much rather have no or zero pension and get the pay,” says former work and pensions secretary Thérèse Coffey.
“More choice should be given. This is particularly true for attracting people from the private sector to higher grades, where this is a major barrier.”
Her comments echoed those made by Gus O’Donnell, former head of the civil service, in April: “We desperately need a switch towards more pay, less pension in the public sector. You can’t get a mortgage based on your future pension.”
Such a proposal has already sparked a backlash from trade unions, as Fran Heathcote, general secretary of the Public and Commercial Services Union, has claimed that one should not come at the expense of the other. 
However, the idea is gaining traction. In July, United Learning, the UK’s biggest schools group, wrote to teachers at its 92 academies offering them higher salaries if they left the Teachers’ Pension Scheme, moving instead to a defined contribution scheme.
The numbers underlying the potential shift are stark.
On one hand, public sector pay has fallen far behind the private sector. 
Since the start of 2019, private sector pay has climbed by 6pc in real terms, while in the public sector, it was up by just 1pc. 
The disparity is even more clear for earners at the top end of the pay scale. From 2013 to 2023, pay at the director-general level in the civil service fell by 16pc, the IFS found.
“The thing that is very clear in the public sector, which is a difficult thing to say politically, is who has been hurt most by public sector pay over the last 15 years?” says Mr Johnson. “It is doctors, judges and head teachers, the top earners, senior civil service. They have seen their pay really massively cut.”
But on the flip side, workers employed by the Government benefit from pension schemes that are vastly more generous.
A private sector worker on the auto-enrolment scheme will secure a minimum of 8pc of their salary in pension contributions, paying in 5pc of their salary themselves before securing at least 3pc from their employer’s contributions. 
However, under the scheme, that additional 3pc is only paid on earnings between £6,240 and £50,270. 
This means that a person earning £35,000 may in fact only receive 2.5pc of their salary in employer contributions, according to the IFS.
By contrast, the job advert for Simon Case’s replacement as the head of the civil service includes employer pension contributions of nearly 29pc.
This ratio is similar for a teacher earning £35,000, as they pay in 8.6pc of their salary and secure a 28.7pc top-up from their employer. 
This means their total pension contributions are 37.3pc of their salary. In the police force, that total rises to 48.7pc.
However, at the lower end of the pay scale, public sector salaries are so low that many workers cannot afford to fully take advantage of the pension schemes.
In the NHS, around 15pc of entry-level salary nurses and a fifth of doctors in core training choose to opt out of the pension scheme. 
Elsewhere across the public sector, the IFS found that of those earning between £10,000 and £16,000 per year, 13pc opt out of their pension contributions.
This is more than double the 6pc rate amongst those earning over £31,000.
A report on pay and morale in the police force by the Social Market Foundation (SMF) earlier this year found that 7pc of employees have opted out of the pension scheme, with a further 18pc thinking about doing so. Among those who had opted out, more than three-quarters said it was because the contributions were unaffordable.
Rebalancing public sector pensions and pay would be a good lever to pull, particularly to encourage new workers into the public sector, says Jamie Gollings, deputy research director at the SMF. 
Meanwhile, for a chancellor who needs to simultaneously boost public sector productivity while filling a £22bn black hole in the public finances, the idea might sound like a silver bullet. 
But there is a very big disincentive for Ms Reeves to even consider it, says Steve Webb, partner at consultancy group LCP and a former pensions minister.
“If you are an economist then you regard pensions as ‘deferred pay’, so the balance between pensions and pay doesn’t really matter. But it matters a lot in terms of government finances,” says Webb. 
Public sector pay is a cost on today’s balance sheet, while pensions are a future liability.
Cutting pensions and increasing pay might mean reduced costs in decades to come through lower pension payments, though it would increase costs on the public balance sheet through higher bills today, says Webb.
“Worse still from the Government’s point of view, if lower pensions meant lower employee contributions today, then you’ve got a reduction in money to spend on today’s retired teachers, nurses and civil servants,” says Webb. “The Government needs to find more money now to pay pension promises it has already made.”
If the public finances were measured over the long term and gave proper weight to longer-term savings then this shift could be attractive, says Webb. But this is not how the system works.
There is then the question of optics, especially for a chancellor who has already hammered millions of pensioners by scrapping winter fuel payments. 
Targeting public sector pension pots may be one step too far, even for a government burdened by what they claim is the worst economic inheritance since the Second World War.
“They will want to exercise some political caution if it sounds like they are basically going to be hitting pensioners from another angle,” says Gollings.