A profit scheme without honour

May 17, 1996

The concept of "profit" in relation to universities and colleges of higher education was until recently as alien to their staff as it was to officials at the Inland Revenue. However, the establishment of a profit-related pay scheme in one higher education institution has opened the way for the sector to join the rush for a tax give-away that is increasing in popularity at an almost exponential rate in the private sector.

The first move towards establishing these schemeswas taken when the Universities and Colleges Employers Association arranged a seminar on profit-related pay for institutions. So why are the employers interested and what should be the union's response?

Profit-related pay took off following the 1987 Finance Act which allowed for tax relief on cash payments by employers to employees. The tax relief was seen by then Chancellor Nigel Lawson to be only a catalyst, to be removed later. He said in his budget speech of 1986, "it might make sense to offer some temporary measure of tax relief to the employers concerned". However, the Government chose to retain the tax relief and, in 1991, doubled it to 100 per cent. At this point the number of schemes began to increase sharply and it is estimated that this year tax relief for profit-related schemes will cost the Treasury some Pounds 1 billion.

Changes in the nature of the public sector have meant that colleges and universities are now able to establish schemes. It is also suggested that other bodies such as NHS trusts and locally managed schools could also take part. One billion pounds of public money, which currently provides a subsidy to private employers, could be used immediately to reverse the cuts made to further and higher education in the budget of November 1995 and thereby provide campus staff with a decent pay rise. It would appear, however, that profit-related pay may be offered as an alternative to a proper annual pay rise. This would be unacceptable.

The suppression or removal of annual percentage pay increases is not the only problematic aspect of profit-related schemes. Unfortunately, such schemes carry with them significant risks to the financial security of their members and serious professional concerns for educationists. The type of schemes being launched in higher education involves the voluntary sacrifice of gross salary to a "pool" which varies in relation to an organisation's ability to meet its surplus or profit target and attract the tax relief. Membership of such a scheme involves an individual in accepting a change to his or her contract by varying the gross salary figure. Such a change can have serious implications for pension, sickness and maternity pay and for individuals who choose to leave the scheme or in scenarios where the scheme collapses. Many individuals will also have concerns that profit-related pay will draw into question principles of academic independence.

Given that any future government cannot afford to allow the unfettered growth in the number of profit-related pay schemes, is this really the magic wand the accountancy firms who market the schemes would have us believe? Natfhe has joined the TUC and other unions in arguing for the removal of tax relief from profit-related pay schemes. The union has made the major political parties aware of the imminent widescale introduction of such schemes into the sector and is awaiting clarification of their policies.

The recommendation from Natfhe to its members to oppose the establishment of profit-related pay schemes reflects the union's belief that the schemes carry with them significant risk and undermine the negotiation of proper annual percentage pay increases. However, should members wish, despite the risks, to negotiate a scheme then, the union believes - given that it is their salaries that are being sacrificed - they should be able to have full participation in the design of the scheme, including safeguards in the event of its collapse.

Much of the marketing to institutions highlights the fact that the tax relief sum may be split in any proportion between the employees and the employer. It will be interesting to see what proportion of the tax relief, attracted by employees' salary sacrifices, the employers propose to keep for themselves. Differences in the proportions of tax relief money received by employees and employers will result in colleagues on the same salary grade, in different institutions, receiving different remuneration.

Profit-related pay is neither a "quick fix" for the sector's problems nor a genuine route to the restoration of academic salary levels. It is not even neutral. Rather, it would expose staff who have suffered below inflation pay rises to significant financial risk. Profit-related pay would therefore only succeed in introducing yet further insecurities to our already embattled sector.

Jill Jones is chair of Natfhe's Higher Education Industrial Relations Council.

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