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LGA chief urges pensions rethink

The most senior Conservative in local government has urged Chancellor George Osborne to rethink plans to make public sector workers pay higher pension contributions, it was reported today.

Baroness Eaton, the Tory chairman of the Local Government Association, said there was "strong evidence" that increasing contributions by an average of 3.2 percentage points would lead to large numbers of council staff opting out of their pension scheme.

In a letter to Mr Osborne, obtained by The Observer, Lady Eaton warned that a "significant level of opt-outs" from the Local Government Pension Scheme (LGPS) - which has 3.5 million members and assets of over £130 billion - would call into question its "sustainability and viability".

The contributions hike at a time of pay freezes and job losses was "likely to lead to a significant worsening in industrial relations", she said, adding that all political parties within local government "strongly urge" ministers to sit down with employers and unions to discuss alternatives.

Under changes announced by Mr Osborne in the autumn's Comprehensive Spending Review, increased contributions for 6 million members of public sector pensions schemes will be phased in from April next year, saving the Treasury £1.8 billion annually by 2014/15.

Precise details of the hike will not be known until after Lord Hutton delivers the final report of his Independent Public Service Pensions Commission in a few weeks' time, but it is expected that lower-paid council workers earning under £24,000 would be protected from any rise.

According to calculations by the Department for Communities and Local Government, this could mean contributions rising from 6.5% to 9.7% of salary for those earning up to £31,500, from 6.8% to 11% for salaries up to £42,000 and from 7.2% to 13% for those up to £75,000.

Today's letter, co-signed by Labour Mayor of Lewisham Sir Steve Bullock - chairman of the LGA's workforce board - warned that "the main burden of the increase" will fall on middle-earners.

The letter added: "There is strong evidence to suggest that the opt-out rate will be far greater than the 1% envisaged in the spending review announcement. Neither is there any evidence to suggest that full account has been taken of the likely reductions in the local government workforce over the spending review period, a large proportion of which will be scheme members."

There was a "considerable risk" that Mr Osborne would fail to achieve expected savings unless even greater increases are imposed on those scheme members who remain.

And the council leaders warned: "A significant increase in employee contributions at a time of pay restraint, pay cuts and increasing inflation is likely to lead to a significant worsening in industrial relations."

High levels of opt-outs would have "a serious and detrimental impact on the scheme's future sustainability and viability", might distort the bond market and would ultimately lead to "further reliance on the state via means-tested benefits in retirement".

The letter added: "For some years the LG Group has pursued a policy position of the LGPS being sustainable and affordable. In our opinion, these proposals seriously undermine these principles.

"All political groups within the LGA strongly urge that this is recognised and that the Government enters into dialogue with employers and unions."

In a recent poll of its members, the GMB union found that 39% of those who currently pay into the LGPS would opt out if increases were imposed.

The GMB's national secretary for public services, Brian Strutton, told the Observer: "This loss of income will cost taxpayers more, would leave fewer people saving for pensions and would probably bankrupt the LGPS.

"Given that the LGPS has assets of over £130 billion, mainly invested in the UK, this would be a disaster."

A Treasury spokesman said: "As set out in the spending review, the Government will from April 2012 phase in an increase in pension contributions by public sector workers of an average of 3%.

"The Government is in discussion with stakeholders, including the unions, about implementation of this increase with a view to protecting the lowest-paid.

"The interim Hutton review identified the need for reform and the Government is awaiting his final report in spring."