SCS pay reforms ‘will fail without £45m of extra ringfenced funding’

Report also warns ministers that capability-based remuneration will not fix churn
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By Jim Dunton

10 Nov 2021

Ministers must commit to ringfencing the £45m cost of introducing capability-based pay for the senior civil service or risk undermining job satisfaction and performance among top officials, the Institute for Government has said.

A report from the independent think tank says introducing the reforms – which will rate senior officials as “developing”, “competent” or “expert” and pay them correspondingly – will be a major mistake unless the move is properly resourced.

The study, commissioned by the government’s own Office of Manpower Economics, also shines a light on the impact of the past decade of wage restraint for civil servants and the rebalancing power of civil service pensions compared the with private sector offer.

It says median civil service salaries have fallen by 14-17% in real terms over the past decade and finds pay for director-level officials is half that of their private sector equivalents and two-thirds of their public sector peers.

Proposals to introduce capability-based pay for the SCS were set out in June’s Declaration on Government Reform. A Cabinet Office estimate from earlier in the year suggested that introducing the new system will cost just under £45m for SCS1 and SCS2 officials, around 7% of the paybill.

The IfG says the government will need to commit to spending that amount every year, rising with inflation and adjusted to need, if capability-based pay is to stand a chance of being better than the do-nothing option.

It adds that unless the funding is ringfenced, government decisions could prevent departments from offering staff base pay that matches their demonstrated capability. The IfG says that any future pay restraint should also only apply to the base pay of civil servants, preserving the capability-based system even in the face of another pay freeze like the one introduced for the current financial year.

“Failing to properly fund the initial £45m needed for the change, or the ongoing running costs of reform, would be worse for civil service morale and skills retention than doing nothing at all,” the think tank said.

When Michael Gove launched the Declaration on Government Reform, he said capability-based pay for senior officials would reduce staff churn. The then-Cabinet Office minister said the new system would “incentivise those with deep subject expertise who stay in areas where they add value and continue to develop”.

However, the IfG says reforming pay is“unlikely to do much on its own to reduce job churn within the civil service”. Its report says interviews with private sector experts, professional bodies and civil servants themselves found changing the incentives for promotion and more focus from ministers and top officials on keeping people in post would make a bigger difference.

Report co-author and IfG programme director Alex Thomas said the think tank’s research contained some important lessons for ministers.

“The government is right to reform the structure and award of civil service pay, but any new system must be properly funded,” he said.

“And we should not over-estimate what pay reform can achieve. Senior civil servants are motivated by the work they do, their seniority and status more than by pay.

“So changing how civil servants are promoted and the skills that ministers and permanent secretaries value is just as important as how much government officials are paid.”

Civil service pensions payback

The report also provides significant evidence of the extent to which civil service pensions give officials post-retirement compensation for receiving lower income than private-sector counterparts during their working lives.

The IfG says that civil service pensions effectively remove around half of the pay gap between the civil service and the private sector.

It says that a typical 52-year-old SCS1 official on a salary of £78,500 has an annual pension contribution worth £18,300 of additional salary compared to the equivalent private sector worker.

“This means that, when taking pensions into account, a worker in the private sector would need to earn £96,800 to match the overall financial value of the SCS1 official’s £78,500 salary plus pension,” the IfG said.

But the think tank notes that as the “typical” private sector worker used for comparison purposes is paid £118,300, they still fare better than their SCS equivalent, but by a smaller margin than their base pay suggests.

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