Treasury proposals to increase public sector workers pension contributions by 3% over the next three years – equating to £900million for the Local Government Pension Scheme (LGPS) – could destroy the Local Government Pensions Scheme ahead of Lord Hutton’s final report on the future of public sector pensions due out next month.
To protect the low paid and phase in the additional contribution rates implies significant increases for high and middle earners according to Communities and Local Government (CLG): 15% for those on £150,000 or more and 13% once you reach £42,000; at £24,000 contribution rates jump from 6.5% to 9.7% and much higher rates in the LGPS than in many other public service schemes.
Such increases could lead to large numbers opting-out of the scheme; 40% according to the GMB union - and that would break the scheme before Lord Hutton gets the chance to fix it. Yet the Treasury has estimated that take up will be reduced by a mere 1%!
Not only will the Government not get its £900million if significant numbers opt out, but funds will face increasing deficits and employers could end up having to put more money in than they do today, which will result in a net loss to the public purse.
A mass opt-out of the LGPS would also have unintended consequences in terms of market reverberations. This would accelerate the maturity of schemes, bringing forward the date when payments exceed contributions, requiring different investment strategies to match assets and liabilities. Funds would need to switch from investing in riskier assets such as equities to less risky assets such as bonds. For the LGPS with over £130billion invested, of which some £40billion is in UK equities, this would have a major impact on investment markets.
By virtue of being funded, the LGPS can raise £900million in more than one way. The LPFA for one says that to achieve the correct balance between fairness and sustainability, there are more sensible options than merely increasing employees’ contribution rates. Options such as reducing accrual rates, increasing retirement ages or removing the final salary basis can collectively and more effectively generate the required reduction in employer contribution rates the Treasury is claiming.