Pension fund managers have joined unions in protests over Treasury plans to increase employee contribution rates.
The head of the London Pensions Fund Authority (LPFA) has warned that the government’s plans will lead to a mass opt-out, increase fund deficits, and leave cash-strapped local government employers to pick up the bill.
LPFA chief executive Mike Taylor said a large-scale opt-out could also have a major impact on investment markets as funds facing growing deficits are switched away from equities to less risky investment strategies such as bonds.
Mr Taylor’s intervention comes as TUC general secretary Brendan Barber meets with Cabinet Office minister Francis Maude to discuss the government’s approach to public service reform.
It also follows a meeting between Department for Communities & Local Government officials and the Local Government Pension Fund reform group which saw fund managers, unions, local government employers and actuaries ask for the Treasury to rethink its plans to increase employee contribution rates.
Chancellor George Osborne announced in October’s spending review that public sector pension members would be asked to pay more to their pension as part of the drive to reduce the deficit and the LGPS is set to contribute an extra £900m over the next three years.
While the increase required would average an extra 3% per pension fund member, a commitment to protect the lowest paid means that the percentage increase is set to be a larger one for high and middle earners.
DCLG has calculated that this could be as much as 15% for those earning £150,000 or more, 13% for those on £42,000 or more, with a cliff edge at the £24,001 where contributions would leap from 6.5% to 9.7%.
With GMB research suggesting that 39% of members would leave the LGPS if their contribution rates increased by 3% - compared to a Treasury calculation that just 1% would - Mr Taylor said a larger increase in rates “will doubtless lead to large numbers opting-out of the scheme”.
“This would have the effect of breaking the scheme before Lord Hutton gets the chance to fix it,” he added.
“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 it 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.”
The LAPF and other fund stakeholders are calling on the Treasury to look at other ways to address the affordability of the LGPS, such as reducing accrual rates, increasing retirement ages or removing the final salary basis of the scheme.
Mr Taylor said: “By virtue of being funded, the LGPS can look at the problem of raising £900m in more than one way to find a solution that can meet the cash target whilst maintaining membership.”