Tax on pension saving threatens more than just 2m local govt workers

Naomi Cooke argues that the coalition's tax on pension savings is arbitary policy making at its worst.

Naomi Cooke is the GMB National Pensions Officer

When a 3 per cent increase in members’ pension contributions to public sector schemes was announced in the Comprehensive Spending Review, few people will have recognised the wide-ranging consequences. Even now the message is muted outside the world of local government pensions. Nevertheless, by the end of this Parliament the biggest pension scheme in the UK could be in tatters.

The treasury has not published any assessment of the impact of adding 3.2% (as it now is) to the employee contributions of Local Government Scheme members. No consideration of the increased opt outs which a recent GMB survey indicates could see more than 40% of current members priced out of the scheme.

Perhaps more shockingly, there seems to be no questioning of the government message that it deems it acceptable to introduce a ‘tax’ on pension savers.

The LGPS is unique among public sector schemes in two fundamental respects. Firstly, pensions for local government workers are not funded by the Treasury. The LGPS has £150bn in assets to pay the pensions of the scheme’s four million members.

Consequently, the LGPS doesn’t feature in the treasury’s spending figures but the government has decided to take more than £1bn a year from the scheme members in order to allow council budgets to be cut further. Not 1p of the £1bn will go into improving the funding level of the scheme. The Treasury expects councils to reduce their contribution to the scheme by 3% in response to the rise in employee contributions.

The second unique feature is the scheme’s demographic composition. Council salaries start at 7p above minimum wage, 68% of LGPS members earn less than £22,000 a year. To protect the lowest paid as government has suggested, some of those earning more will see their contributions virtually double in order to generate the money the treasury demands. On this basis the GMB survey found that 53% of members said the scheme would be unaffordable to them.

Current and Potential LGPS Member Contribution Rates

Full Time Equivalent Pay CurrentContribution Flat Rate 3% Increase 3% Increase & Protection for <£18,900
< £12,600 5.5% 8.5% 5.5%
£12,601 – £14,700 5.8% 8.8% 5.8%
£14,701 – £18,900 5.9% 8.9% 5.9%
£18,901 – £31,500 6.5% 9.5% 12.0%
£31,501 – £42,000 6.8% 9.8% 12.5%
£42,001 – £78,700 7.2% 10.2% 13.4%
> £78,700 7.5% 10.5% 14.0%
Average 6.4% 9.4% 9.4%

Pension scheme reform is never as simple as inexorably increasing employee contribution rates. The government is wrong to have taken one line from the executive summary of the Hutton Commission’s Interim Report: “the most effective way to make short-term savings is to increase member contributions and there is also a clear rationale for doing so” and assume it is as true for the LGPS as it is for the Judges’ Scheme.

Similarly the Chancellor was wrong to say that public sector schemes were set up in the 1950s with equal contributions from employers and employees:  the LGPS is nearly 100 years old and is a balance of cost scheme like almost all defined benefit schemes in the private sector. The issue is not just the impact on LGPS members who are also facing reductions in future pension benefits, pay freezes or cuts and job losses.

It’s not even the message it sends to others deciding whether to save for retirement or spend now:  on the one hand DWP seeks to make pension saving automatic in the private sector in an effort to encourage retirement planning, while on the other, Treasury is pricing public sector pension savers out of schemes.

The issue is even broader, the LGPS has positive cash flow of around £4bn a year and is a major investor in UK businesses and communities.  This investment is under threat as the scheme’s funds face the challenge of fewer contributors and an ageing membership.  This isn’t prudent economic stewardship, this is arbitrary policy making at its worst.

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