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UK local government pension scheme plan could raise contributions by 1.5%

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  • UK local government pension scheme plan could raise contributions by 1.5%

UK - Proposals to deliver £900m (€1bn) in savings to the UK's funded local government pension schemes (LGPS) could see accrual rates changed and a contribution increase of 1.5% on average for members, according to the government.

The contested changes - announced as part of the chancellor of the exchequer's spending review last year - will see local government funds in England and Wales save the equivalent of the 3.2% raised through higher contributions in unfunded public sector schemes.

The Department for Communities and Local Government (DCLG) has now put forward proposals that would see the burden of cost reduction shared by adjusting accrual rates from 2013, saving £450m, while a 1.5% increase in contributions from 2012 for the average member would result the same amount raised.

However, the DCLG was keen to stress that any contribution changes would "progressively protect low earners", with members on less than £15,000 per annum not asked to contribute more, while those on salaries up to £21,000 would only see increases of 0.6% by the end of April 2013.

Unions have so far been highly critical of any increase in contributions, warning that they came at a time of wage freezes and job losses across the public sector and that this - combined with low returns across LGPS and a potentially higher opt-out rate - could lead to the funded system becoming cash-flow negative.

The country's largest union, Unite, is also in the process of balloting members on strike action at the end of the month.

Consultancy Barnett Waddingham argued that most would likely be in favour of a second option outlined by the department, resulting in an average 1% increase in contributions, but with a further £600m in savings made through adjusted accrual rates.

However, Graeme Muir, partner, was critical of the reforms taking place at all.

"With a new and different scheme due from 2015, you have to wonder if just hanging on for another year or so would make more sense given all the resulting complication and costs of implementing these short-term tweaks," he said.

The Local Government Group, whose former chairman Baroness Eaton had previously warned that any contribution increases could "seriously undermine" the system, said it was aware of the proposals and considering its response.

It had previously written to the government suggesting similar reforms as now outlined, but suggesting a voluntary reduction in accrual rate for members who felt they could not afford higher contributions.

Meanwhile, John Wright, head of public sector pensions at Hymans Robertson, admitted that, while changing accrual rates was "not ideal" when attempting to encourage pension saving, it could be "unavoidable to minimise contribution increases and keep members in schemes".

He noted that some members could have three sets of benefits outlined on their statement - those calculated under pre-2008 reforms, those based on the accrual rate implemented under the previous Labour government and the post-2012 accrual.

"Again, this may be a price that has to be paid to reduce opt-outs," Wright said. "In the interest of simplicity, the changes should ideally dovetail with the post-Hutton reforms."

Of the consultation, which concludes in early January next year, local government minister Bob Neill said he hoped all parties involved in negotiations would consider the proposals in a "constructive manner".

He added: "We will continue to engage with local government and trade unions throughout the consultation, as they have a key role to play."

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