The extra £6bn of spending cutbacks in 2010-11 announced by George Osborne in May appears to have had only a marginal impact on NHS spending, but is unlikely to be true of June’s emergency budget for 2011-12.  It’s going to hurt in the months and years ahead.

NHS leaders have so far bravely sheltering behind their mantra - “The problem is £20bn, the answer is QIPP”- know in their hearts that budget reductions on this heroic scale mean fewer jobs and lower pay.  Meanwhile, most now anticipate a real terms decline in NHS pay rates, just as rising inflation in the wider economy and the beginnings of recovery in the private sector start to threaten recruitment and retention. 

And then there are the persistent anxieties about pensions. “We will commit to establishing an independent commission to review the long term affordability of public sector pensions, while protecting accrued rights,” states the coalition’s NHS policy summary.  Reasonable enough in itself, the National Association of Pension Funds has also called for such a commission; yet it is also a clear nod towards the lobbying bodies, from the Confederation of British Industry to the Institute of Directors, who argue that “gold plated” public sector pensions are no longer sustainable and need to be cut back drastically.  The total liability for these schemes now stands at £1 trillion, or £40,400 for every UK household, according to the CBI in April.

It’s not just here.  Across Europe governments in deficit, under pressure from the European Commission, are trimming public spending commitments and the pay and conditions of government employees.  Spain, like the UK, has recently followed the path of Ireland and Greece.  Britain has thus far been spared the reaction seen elsewhere, ranging from rioting and burning in Athens to demonstrations and targeted strikes in Dublin. 

Yet upon this sea of miserabilism floats opportunity.  The NHS still employs well over a million people, a not insignificant share of the total national workforce, and one where government retains direct control over pay and conditions.  So what might be the impact of a package offering enough job security to renew staff commitment; enough confidence in the long term to encourage NHS employees to invest rather than save?  Rhetoric about pay relativities across the UK– how much more a nurse’s pay buys in Workington compared with Woking – tells of the economic boost that a confident public sector workforce can bring to a struggling local economy.

To be effective, such a package would need to offer security in retirement as well as in the short term.  In effect it would mean the continuation of the final salary, index-linked pension scheme familiar to NHS staff, albeit with a recalculation of employee contributions. 

This is hardly revolutionary, but is it affordable?  Two key facts about the NHS pension scheme need to be understood.

Firstly, unlike most commercial pension schemes (and some public sector schemes, such as that for local government) the NHS pension scheme is unfunded.  This is not a pejorative statement.  It simply means current pension payments are funded directly from taxation.  After you retire, your pension will be paid from the taxes of future workers, just as your own taxes currently pay the pensions of those who have already retired. 

So disregard the wilder statements about monstrous black holes in the pension scheme.  The NHS pension scheme contains no black hole. Nor has it been burned by recent falls in stock market values, unlike many commercial pension schemes, because there is no fund to invest.  By way of comparison the local government pension scheme has suffered materially in recent years.  By 2007 its asset value only covered around 82% of its estimated liabilities, and, with share prices falling, employer contributions may need to rise to plug the gap.

Secondly, the NHS pension scheme has an established process for rebalancing its income and expenditure and ensuring financial balance.  This process takes place every five years: the last was in 2005, when employer contributions were raised to 14%.  Some recalibration will also be necessary this time, primarily because life expectancy continues to rise: between 1998 and 2008 the four main unfunded schemes paid out an average of 38% more as a consequence.  But essentially the NHS scheme is in financial balance and will remain so.

In reality the current problem with the NHS pension scheme is more about perception than about funding.  There is a perceived inequity between private sector employees, who have seen their firms withdraw from defined benefit schemes, and protected public sector workers.  This imbalance, combined with TUPE (Transfer of Undertakings Protection of Employment) regulations, increasingly inhibits the ability of commercial firms to expand in the health sector.  For in an uncertain world, an NHS pension is a prized asset and not to be given up lightly.

So why dent the value of this asset?  Why not instead consider what might be an acceptable matching bargain on pay, job security and workforce flexibility?  With tens of thousands of jobs at risk and little in the kitty for mass redundancies, there’s scope for some serious horse-trading on pay and conditions during the summer.