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Pension opt-out claims questioned

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Pension actuaries have said that an increase of 3% for public sector pension contributions will not undermine the plan’s viability.

Punter Southall has contradicted predictions of a large scale opt-out from unions, fund managers and the Local Government Association.

John Prior, head of Punter Southall’s public sector outsourcing team, said: “The majority are likely to stay in the scheme”.

He identified equivalent situations in the private sector, where employees in final salary schemes have mostly decided they would be better off continuing to save.

The LGA wrote to chancellor George Osborne, urging him to reconsider proposals to increase contributions to the Local Government Pension Scheme (LGPS) by an average of 3.2%.

While the Treasury has calculated that only about 1% of members would opt-out, a GMB survey of members suggested the proportion would be more like 40%.

Ministers including Mr Osborne are already in talks with unions, but one government source told The Telegraph the LGA was acting as a “tax-payer funded lobby group”.

Mr Prior’s comments contradicts earlier statements by the LGA, unions, fund managers and other actuary firms. Hymans Robertson partner John Wright said concerns that the contribution increase, coming after pay freezes and rising costs of living, could lead to a large number of opt-outs were “well-founded”.

Punter Southall’s head of public sector also said the London Pension Fund Authority’s claims of upheaval for investment markets were unfounded.

“If opt-outs increase, this is unlikely to have a significant effect on the scheme’s overall maturity and hence investment strategy in the short-term, so the idea that this change will distort the bond market and impact on the UK stockmarket seems far-fetched,” Mr Prior said.

However, he did accept the LGA’s argument that the fully funded LGPS scheme was in a very different position from other, unfunded, public sector schemes.

For example, he said, the LGPS had a higher pension contribution of between 5.5% and 7.5% depending on salary, compared with 1.5% and 3.5% for the civil service.

Therefore the proposed blanket increase may not be the fairest way of achieving cost savings, even if they are sustainable, he added.

  • 1 Comment

Readers' comments (1)

  • From: Mike Taylor, chief executive, London Pensions Fund Authority

    In querying the negative impact of the government’s proposed increases to local government pension contributions, John Prior of Punter Southall (“Pension opt-out claims questioned”, LGC Feb 21) is at best naive.

    It is not clear on what basis Mr Prior draws his conclusion that a large proportion of LGPS members will stay in the scheme, despite facing a significant hike in contributions, but his argument flies in the face of the testimony of numerous local authority funds, trades unions, actuaries and other pensions industry professionals.

    In common with the overwhelming majority of stakeholders with a vested interest in the sustainability and affordability of the LGPS, we believe there is a very real danger that significant numbers of LGPS members will opt out. This being the case, it is hard to see how this could fail to impact on the maturity profile of the LGPS, and thus on the investment strategy of local authority funds, with a significant knock-on effect on bond and equity markets.

    It is even harder to see how Mr Prior can sustain his argument given his acknowledgement that LGPS contributions are already significantly higher than those for other public sector schemes.

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