News / Thinking out of the box

Headlines that public sector workers in the north were to be paid less or that millions of public sector workers could have their salaries frozen for years may have slightly overstated the Budget announcements on regional pay. But chancellor George Osborne's decision to accelerate proposals to address a perceived public sector premium could have implications for the NHS.

While some reports suggested Mr Osborne was launching 'radical plans' to 'end the system of national pay bargaining', his actual comments were less provocative. 'We're looking to see whether we can make public sector pay more responsive to local pay rates,' he told the House of Commons in his Budget statement. 'We should see what we can do to make our public services more responsive and help our private sector to grow and create jobs.'

It is not the first time Mr Osborne has raised the issue. In fact he asked the various public sector review bodies to look at exactly this issue back in the autumn statement. But while he used the Budget to publish the Treasury's evidence to this review, he also revealed that 'some departments will have the option of moving to more local pay for those civil servants whose pay freezes end this year'.

With this revelation, Mr Osborne appears to be jumping the gun – making the move before hearing
the reports of the pay review bodies. In so doing he underlines the government's enthusiasm to make changes in this area – or, to use the current jargon, to introduce more 'market-facing pay'.

But any changes will not be straightforward, particularly in the NHS. There is no appetite among NHS employers or unions for a move to full-blown local pay setting. NHS Employers is keen to stress that NHS bodies do want more flexibility on pay and conditions – pay is a significant chunk of overall budgets and all bodies face demanding productivity targets. But they also have concerns about the risk of increasing administration costs.

'Most employers would like a more flexible approach to pay and terms and conditions to be delivered through the development of the national framework – for instance, extending supplements based on the location of the organisation,' said Dean Royles director of NHS Employers. 'Employers are concerned that a crude zonal or regional system would not work effectively across the range of occupations and professions that exist in the NHS.'

Public sector workers union Unison said it was clear the government wanted to lower pay rates 'in areas of the country with high unemployment' and to 'start earlier than expected'. It labelled this 'unfair', coming on the back of pay freezes, and suggested the move would depress struggling local economies.

Royal College of Nursing chief executive Peter Carter took a similar stance. 'Introducing regional
pay would only serve to drive down pay in certain areas and lead to damaging competition between NHS employers,' he said. 'Ultimately it is patients who would suffer.'

In reality, despite over-simplistic headlines, Mr Osborne is unlikely to have real local pay in mind with all NHS bodies negotiating their own pay with workers. After all, foundation trusts already have the option to move away from the national Agenda for Change deal, which covers virtually all non-medical staff including nurses, other practitioners and back-office staff – an option largely ignored.

Instead what we are more likely to be looking at is national pay with more local zones. This was the model highlighted by the government in its evidence to the pay review bodies. 'While large private sector employers tend to retain a national bargaining structure, they often create a number of zones to gain greater wage efficiency,' the evidence said.

Further detail is clearly needed before staff and employers can really start to analyse the possible implications. 'There isn't a clear view across all employers on this,' Geoff Winnard, head of Agenda for Change and non-medical pay at NHS Employers, told Healthcare Finance. Getting a clear view is particularly challenging given that the current proposal is still a bit nebulous.

However, he stresses that the issue is complex and changes could have unintended consequences. 'Even if there were a proposed new system, there would be an issue of how to get from here to there within the confines of future limited pay settlements,' he added.

Greater flexibility
What we could be looking at is not a new pay system, but a more flexible version of the existing national system. The Agenda for Change pay system already allows for two types of pay adjustments to recognise local market conditions. There are high-cost area supplements (HCAS) providing capped top-ups to salaries for those working in inner London (20% supplement), outer London (15%) and some areas on the London fringe (5%). In addition local bodies can use local (and, in some limited cases, national) recruitment and retention premia to attract or retain staff to roles where there are recruitment difficulties.

The government has highlighted research suggesting the public sector premium (over local private pay) is 8% nationally, but stretches from 18% in Wales to just 0.5% in the South East.

 One seemingly plausible approach for the NHS would be to expand the number of HCASs. But this has its own difficulties. For a start, more zones mean potentially more cliff edges between zones, which can create recruitment difficulties for the organisation in the lower pay zone. However, zones, which would apply a top-up to all staff within that zone, fail to tackle the differences in relative pay rates between the professions.

The fundamental problem perhaps with much of this is that both the HCAS system and recruitment premia are set up in terms of paying more where needed. There is no option for a negative recruitment and retention premium. Yet it is unlikely Mr Osborne had in mind changes that would lead to opportunities to increase public sector pay or widen the claimed public sector premium.

'The government has already said pay increases for the next two years will be limited to an average of 1%. This suggests it might be some years before having much impact,' said Mr Winnard. 'Perhaps. it would involve gradual differentiation building up over years with targeted supplements in certain areas. This would not be without problems. We have already had a two-year pay freeze and clearly there are employment relations risks to some of this.'

He stressed it was important that NHS organisations were not disadvantaged from any changes in the pay system. They would be concerned if a lower local pay bill led to less funding. The market forces factor (MFF) is used to reflect unavoidable cost differences, including those from staff. It influences allocations to primary care trusts and top-ups to tariff payments under the payment by results system.
There would be no obvious direct consequences for the MFF as a result of introducing more regional pay components. However, as the MFF is informed by local private sector pay rates, the impact of public sector pay rates on local private markets might slowly feed into individual organisations' MFFs.

If there is a message from employers, it is this: tread carefully. Mr Winnard summed up: 'Employers are telling us they are concerned about the affordability of the national pay system and the priority to meet challenging efficiency targets. Most suggest they would be looking for the national framework to be modernised to make it more affordable and flexible, particularly around some terms and conditions. They are not saying that they want to take over [all this national mechanism] themselves'.
 
The real debate is likely to start when the Department of Health submits its evidence to the pay review body. That is when the service can expect to see a more specific proposal for translating the chancellor's proposals into the NHS.