More than 50,000 of the lowest-paid local government workers will stop saving if they are asked to pay more towards their pensions, previously unreleased Treasury documents suggest.
The true cost of the government’s plan to raise £1.76bn by increasing employee contribution rates has been laid bare after the Treasury was forced to release its calculations following a Freedom of Information (FoI) request.
The Treasury had previously refused to say how many public sector workers might opt out as a result of the proposal to increase contribution rates by an average 3% per pension scheme member.
Calculations published at the time of the announcement last October stated the £1.76bn saving “assumes an increase in the opt-out rate equal to one per cent of total paybill”.
But the government has always maintained there was no calculation of opt-outs in terms of membership numbers to compare with data gathered by pension funds and unions opposed to the contribution increase.
However, documents released to LGC and GMB union under two separate FoI requests show estimates were made before the spending review, equating the 1% of paybill figure to 8% of all pension members earning below £21,000 opting out.
In local government, this would mean more than 53,000 local government staff leaving the Local Government Pension Scheme (LGPS), or 4.9% of the total sector workforce.
But the number of opt-outs could be even higher because of problems with the Treasury’s assumption.
According to an LGPS stakeholder, the 1% opt-out figure was described as “one of the riskiest assumptions” in the spending review by a senior figure within the Office of Budget Responsibility (OBR) at a meeting with the GMB union.
A spokesman for the OBR, which described the assumption as “uncertain” at the time of the spending review, refused to comment on statements made in a private meeting.
The assumption is particularly uncertain with regard to the LGPS, which is expected to contribute £900m of the overall £1.76bn saving, because some of the factors taken into account are incorrect.
The document states that, although the lowest-paid staff are most likely to opt out of pension schemes, those earning less than £21,000 will receive a pay rise of at least £250 extra in the same year the contribution increase is implemented.
However, this increase for the low paid promised by the chancellor in last year’s Budget did not apply to councils. Local Government Employers in fact imposed a universal pay freeze during the most recent annual pay negotiations with unions.
Specific examples in the assumption focus on the civil service, but their pension scheme has a much lower employee contribution rate than the LGPS - a bottom rate of 1.5% compared with 5.5% - and salaries are generally higher. Only 38% of civil servants earn less than £21,000, compared with 60% of local government workers.
Hymans Robertson partner and actuary John Wright said: “You have to be careful not to anticipate behaviours to be the same in local government as the civil service because they are paid much less.” He warned: “There is a risk that the Treasury assumption will turn out to be optimistic”.
The Treasury told LGC that it had no evidence or documents relating specifically to LGPS membership or opt-out rates.
If its assumption regarding increased opt-outs is incorrect - as feared by actuaries, pension fund managers and the Local Government Association - it could mean that the £1.76bn saving it has budgeted for is not achieved.
A Treasury spokesman said: “The assumption on opt-out rates set out at the spending review was certified by the independent OBR. The government is taking steps to limit the impact of higher member contribution rates on those most likely to opt out by phasing in the changes over three years and ensuring lower earners are protected.”
Sir Steve Bullock (Lab), chairman of the Local Government Association (LGA) workforce board, said there had been long-standing concerns that opt-outs ” will be far greater than the 1% envisaged in the spending review”.
He said: “Due recognition has not been given to the fact that the LGPS is a funded pension scheme and its workforce is different to other parts of the public sector. Unlike other public sector workers, the local government workforce did not receive a national pay increase for 2010/11 or 2011/12, meaning a pension contribution increase would hit them proportionally harder.”