The implications of increasing council employees’ pension contribution rates “may not have been fully considered”, the Local Government Association has warned ministers.
The LGA has joined unions, actuaries and fund managers in urging caution as the government attempts to raise millions of pounds by increasing the amount of money public sector workers pay into their pensions.
Local Government Association chairman Baroness Margaret Eaton (Con) has warned the chancellor plans to raise £900m through increased contributions could make the Local Government Pension Scheme (LGPS) less affordable - and leave the Treasury worse off.
Baroness Eaton said “a significant level of opt-outs would result in a serious and detrimental impact on the scheme’s future viability” and could impact on the UK investment market if the £120bn of funds are switched from riskier equities to bonds. Opt-outs would also increase reliance on the state pension, she argued.
She also warned that unions might seek to offset the increased contribution rate with a pay increase and “is likely to lead to a significant worsening in industrial relations”.
Treasury officials have told the Department for Communities & Local Government an additional £900m must be raised by 2014-15. This would equate to an increase of 3.2% per LGPS member, but could rise as high as 15% for top earners if the lowest paid are protected.
But Baroness Eaton told George Osborne there was “strong evidence” that the opt-out rate would be greater than the 1% calculated by the Treasury. Research by the GMB union suggests it could be as high as 40%.
The LGA believes the Treasury has not only miscalculated the opt-out rate resulting from the policy, but have also failed to take into account the reductions in the local government workforce.
“There is a considerable risk therefore that the £900m target additional income by 2014/15 will not be achieved”, she said.
Unions and fund managers have already been vocal about their concern that an increase in contribution rates could lead to significant numbers of members opting out, creating a bigger deficit between contributions and pension payments.