Pensions the key to gap between public and private sectors

Pensions are now the main cause of the remuneration gap between the public and private sector, according to the report of the Public Sector Pay Commission. Its analysis is that, excluding pensions, the gap between pay in the public and private sector has closed in recent years due to the cuts in public sector pay.

In general, lower-paid employees are better off in the public sector, while – before considering pensions – the higher paid are generally better off in the private sector. But the pension premium remains substantial.

Comparing pay between the public and private sector is a fraught exercise. Commission chairman Kevin Duffy says in his introduction to the report that the work was more difficult and complicated than expected, and that findings appropriate “comparators” for public sector pay was “difficult and time consuming”.

Like all its predecessors the latest report will attract much debate. However, let’s pull back from the thousands of figures to try to focus on the key issues.

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Looking first at pay, before any consideration of tenure and pensions, nobody disputes that, on average, public servants are paid a lot more. According to the report, median weekly earnings in the public service were 63.4 per cent higher than in the private sector.

However to get any kind of meaningful comparison a host of adjustments need to be made. Public servants are, on average, longer in their jobs , more experienced and better-educated – all factors justifying a higher pay package.

Many of these adjustments , while complicated, are not particularly controversial. But some are.To what extent should public service salaries be compared to large private sector organisations, for example, instead of SMEs? And should membership of a trade union be counted as an explanatory factor for having higher pay?

New comparisons

The commission did not undertake detailed new analysis to compare public and private sector jobs, instead looking at the last major benchmarking report in 2007, updating it for what happened in the meantime and looking at some limited new comparisons.

Its conclusion is that the gap between public and private pay – before taking account of pensions or security of tenure – has closed in recent years due to the public pay cuts during the crisis.

In 2006, public servants were paid 26 per cent more than their private sector colleagues, but the report estimates that by 2014 it was roughly level pegging.

If trade union membership is included in the calculations, public sector employees were paid slightly less than their private sector counterparts by 2014, the report finds. However, recognising the controversy of the treatment of trade union membership, the report points out that if this factor is excluded, average public sector pay still sits a couple of per cent above the private sector in 2014.

The comparison varies hugely depending on pay levels. At lower pay levels, those in the public sector earn 15 per cent more than their private sector counterparts. At higher pay levels, the cash amounts are almost exactly reversed, with those in the private sector doing better.

Well rewarded

Public servants start on good pay levels, in other words, but many do not progress in pay terms as quickly as those in the private sector. Limited international comparisons show that Irish public servants are generally well rewarded by international comparisons, looking at sectors such as health and education at least.

However, this is purely pay. There are two other valid factor in the comparison – security of tenure and pensions.

On security of tenure, the commission says this is important but that it is impossible to put a cash value on it. Those in the private sector would argue that this was a vital support during the recession when tens of thousands of private sector jobs ended , while public servants only left on a voluntary basis.

The second key issue is pensions. The commission finds that this is now the area which gives the bulk of public servants an advantage in terms of their total package.

Around 25,000 public servants who entered employment in the service since 2013 are on a less favourable pension arrangement, and this does not offer them an advantage over the private sector, the report estimates.

However, the remaining 250,000 are on the original scheme, which is found to offer an advantage of 12-18 per cent in advance of their private sector counterparts.

Emergency cuts

For those allowed to retire early, in areas such as the Garda and defence sectors – and the special arrangements for judges – the report finds that the advantage is in some cases even greater.

The commission argues that this should be a factor in pay negotiations, with public servants asked to make a bigger contribution, effectively a retention of part of the pension deduction introduced as part of the emergency cuts.

The talks will thus kick off on this basis. How much the calculations will influence the negotiations is open to question. They are likely to be more affected by the huge political expectation of pay restoration on one side and on the other by the limited largesse which the Exchequer can afford, unless a decision is made to raise taxes.