Teachers, nurses and civil servants ‘could be offered higher pay for lower pensions’

Nurses, teachers and civil servants could be offered higher wages in return for lower pensions under plans reportedly being considered in Whitehall.

The move could help avoid future strikes over pay and retain staff, who are expensive to replace. But the potential move has caused unease among some unions, with some branding it “dangerous”.

Ministers, who have yet to be shown detailed proposals, have not made any decisions on the idea, according to The Times which first reported the proposed reform.

However, it has the backing of Lord O’Donnell, the former cabinet secretary, who said it was a "win-win" reform that could save the exchequer money.

"If you increase a civil servant’s pay by £1,000 you could reduce the net present value of their pension by more than £1,000, which makes debt more sustainable but would also be a trade-off that makes sense to the civil servant because having that money upfront will mean a bank gives them a mortgage," he said. "It’s just this quirk of our accounting that stops it."

Former chancellors have been sceptical of the idea, but Lord O’Donnell said: "An economically literate chancellor like Rachel Reeves will understand that this is making the public finances more sustainable and is very much in the spirit of the changes to the fiscal rules in the budget."

Schools and hospitals have faced waves of strikes in recent years. These have been resolved, at least in the short term, but problems remain.

Almost a third of new teachers quit within five years of qualifying, while the NHS is struggling to fill more than 100,000 vacancies.

Ministers have recommended a pay rise of 2.8 per cent for millions of public sector workers including teachers, NHS staff and senior civil servants next year to the public sector pay review bodies, leading to threats of more strikes.

Cat Little, the permanent secretary at the Cabinet Office, has said that she is reviewing "the balance between pay and pensions", and has begun discussions within Whitehall about offering staff more flexibility.

Sir Steve Webb, a former pensions minister and partner at the consultants LCP, said there was "certainly a debate to be had about whether we have the right balance for public sector workers between pay and pensions".

At the moment most public sector pension schemes are not separate funds but are paid from present tax receipts. Nearly £1 in every £4 raised in council tax is being spent on staff pensions.

Mr Webb warned that while such a trade might be theoretically cost-neutral , for the government it "simply brings forward costs. Because there is no money set aside now for the pensions of teachers, NHS workers or civil servants, any saving in pension costs would not happen until today’s workers retired, whereas the extra cost of higher wages would happen immediately.

"In general, governments prefer to push costs into the future rather than bring them forward, meaning this idea may not appeal to the Treasury".

A government spokesman said: "We are focused on supporting the civil service with the tools it needs to deliver change for working people."