Baroness Eaton warns that higher contributions could force workers to opt out of Britain's biggest public sector pension plan
The government's controversial plan to make public-sector workers pay higher pension contributions is in crisis as the Tory head of local government warns of "strong evidence" that employees will opt out en masse, with disastrous economic consequences.
The extraordinary warning ? and call for an urgent rethink ? has been made in a letter to the chancellor, George Osborne, from Baroness Eaton, the Conservative chair of the Local Government Association.
In the letter, written last week and leaked to the Observer, Eaton demands urgent talks, and says that a "significant level of opt-outs" from the Local Government Pension Scheme (LGPS) ? which has 3.5 million members ? would call into question its "sustainability and viability" as well as harming the economy. She also warns that with fewer people making provision for their retirement, the government would be left to pick up the bill in the long term as a result of "further reliance on the state via means-tested benefits in retirement".
She says an average increase of three percentage points in contributions at a time of pay freezes and rising inflation is also "likely to lead to a significant worsening in industrial relations". In conclusion, Eaton says that all political parties within local government "strongly urge" that their concerns are recognised and that ministers sit down with employers and unions to find a better way forward. The move is a sign of local government flexing its muscles after being pounded with massive spending cuts requiring redundancies.
News of the letter, also signed by Sir Steve Bullock, chair of the LGA's Workforce Programme Board, comes after a meeting last week between the unions and Danny Alexander, chief secretary to the Treasury, at which similar concerns were expressed.
In a recent poll, the GMB union found that 39% of its members of the local government scheme ? the biggest of all public-sector pension schemes ? would opt out if the increases were imposed next April. Brian Strutton, GMB national secretary for public services, who was at the meeting, said that if so many people withdrew, the government's attempt to make the public-sector pension system more affordable would completely backfire.
"This loss of income will cost taxpayers more, would leave fewer people saving for pensions and would probably bankrupt the LGPS," Strutton said. "Given that the LGPS has assets of over �130bn mainly invested in the UK this would be a disaster."
In last autumn's Comprehensive Spending Review, Osborne announced that the six million members of public-sector schemes would have to pay an average extra contribution of 3%, with the increases introduced progressively from next year. He recognised that schemes would want to help lower-paid workers, meaning those on middle and higher incomes paying an even more sharply increased rate. Whitehall officials have calculated that if lower earners (up to �24,000) are protected from rises, those earning �24,001 to �31,500 would see their contributions leap from 6.5% to 9.7% of salary.
The row has exploded just weeks before the former Labour cabinet minister Lord Hutton produces the final report of his Independent Public Service Pensions Commission. In an initial report last autumn, before Osborne's spending review, Hutton suggested raising contributions as a way to solve the problem of deficits but did not name a figure. He is said to believe that an average rise of 1% would be advisable rather than the far higher figure hit upon by the chancellor.
In the report Hutton also raised fears of mass opt-outs if the wrong levels were set. "This in no one's interests, since these people could end up with an inadequate retirement income and could fall on to benefits later in life."
John Wright, head of public sector pensions at Hymans Robertson, which advises the pensions industry, said: "The planned 3% increase in pension contributions is happening at a very difficult time. Public sector workers are facing a two-year pay freeze, high inflation and higher mortgage costs on the horizon if interest rates rise. An increase in contributions as well will reduce take-home pay."
A Treasury spokesperson emphasised that the policy would be phased in from April 2012. "The government is in discussion with stakeholders, including the unions, about implementation of this increase with a view to protecting the lowest paid."
Source: http://www.guardian.co.uk/society/2011/feb/19/public-sector-pension-disaster-threat
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