Pension proposals could destroy LGPS, by Mike Taylor

9 Feb 11
Treasury plans to increase public sector workers contributions by 3% over the next three years could destroy the Local Government Pensions Scheme ahead of Lord Hutton's final report

Treasury proposals to increase public sector workers pension contributions by 3% over the next three years (equating to £900m from the Local Government Pensions Scheme) could destroy the LGPS ahead of Lord Hutton’s final report on the future of public sector pensions.

To protect the low paid and phase in the additional contribution rates over the period 2012/13 to 2014/15 this implies significant increases for high and middle earners according to the Department for Communities and Local Government: 15% for those on £150,000 or more and 13% once you hit £42,000; a cliff edge at £24,001 where 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, which would break the scheme before Lord Hutton gets the chance to fix it. And yet the Treasury has estimated that take up will be reduced by a mere 1%.

If significant numbers opt out-then not only will the government not get its £900m but funds will face increasing deficits and employers could end up having to put more money in than they do today resulting in a net loss to the public purse.

Not least, a mass opt-out of the LGPS would make schemes much more mature, 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 £130bn invested, of which some £40bn is in UK equities, this would have a major impact on investment markets.

By virtue of being funded, the LGPS can raise £900m in more than one way. 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 more effectively generate the required reduction in employer contribution rates.

Mike Taylor is the chief executive of the London Pensions Fund Authority

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