By David Williams
9 February 2011
Treasury plans to increase employee contributions to
public sector pensions risk ‘breaking’ the system by prompting a mass exodus of
members, the chief of one of the UK’s major schemes has warned.
Mike Taylor, chief executive of the London Pensions Fund
Authority, said today that government plans to increase worker contributions by
3% over the next three years could end up costing the public purse more if
staff chose to opt out of their schemes.
The proposals, which are not expected to be detailed in full
by the Treasury until the summer, would aim to bring in £1.8bn a year,
including £900m from the Local Government Pensions Scheme.
But Taylor said the reforms could result in a ‘mass
opt-out’, before Lord Hutton’s review of the pension system is published,
expected in early March.
The Treasury estimates the plans would result in take-up
dropping by only 1%, but Taylor pointed to GMB union estimates suggesting that
up to 40% of employees would leave the LGPS.
Such a stampede would lead to a fall-off in contributions
from employees, causing bigger deficits in funds and bringing forward the date
when payments exceed contributions.
Taylor said: ‘This would have the effect of breaking the
scheme before Lord Hutton gets the chance to fix it.
‘If significant numbers opt out, then not only will the
government not get its £900m, but funds will face increasing deficits at a time
when they can least afford them.
‘Employers could well end up having to put more money in
than they do today, resulting in a net loss to the public purse.
Taylor added that a top civil servant’s pension
contributions could rise from 1.5% of pay to 4.5%, while a social worker’s
could increase from 6.5% to 11%. ‘Is that fair?’ he asked.
But, he added, because the LGPS is funded, it can raise
£900m in more ways than simply increasing employee contributions.
He suggested reducing accrual rates, increasing retirement
ages or removing the final salary basis for some schemes could bring about the
necessary reduction in employer contributions.
‘A break in the link between service accrued and final
salary by protecting previous pension rights via a deferred benefit would cut
the deficit and therefore the payments employers are currently making.
‘It
has been estimated that such an action could reduce deficits in the LGPS by
£20bn.’
