Despite the controversial reforms to the Local Government Pension Scheme, staff are advised to stick by it because private sector provision is generally inferior, finds Kirsty McGregor
Employers and unions have warned of a mass opt-out if controversial proposals to reform the Local Government Pension Scheme go ahead (see panel, facing page). A glance at Community Care’s online forum, CareSpace, shows some local authority-employed social workers are seriously considering leaving the LGPS. A handful already have even though the government is not expected to make a final decision on the reforms for some months.
But pension experts are warning against the temptation to do anything hasty. Because even when the reforms are in place, the LGPS is still a more generous deal than many social workers would have elsewhere.
“It’s not in members’ interests to opt out,” says Tom McPhail, head of pensions research for financial services company Hargreaves Lansdown. “Even if all the reforms go through, it’s still good value.”
He points out that a 30-year-old on £30,000 a year could expect a pension of about half their final earnings from the LGPS, if they worked until they were 65.
“By comparison, if they were to save 5% of their income into a personal pension for the next 35 years, they could expect to build up a pension fund worth £100,000 in today’s money, and this would provide an income of a little over £4,000 a year,” McPhail says. That income would fall to about £3,700 a year after tax was factored in.
“Individual pensions, like stakeholder pensions and self-invested personal pensions, are perfectly valid forms of retirement saving, but what you get out is a direct function of what you put in, and 5% is not going to buy you a decent retirement income,” he says.
John Ralfe, an independent pensions consultant, agrees that the LGPS offers advantages over those available in the private sector.
“The crucial difference between the public and private sector is the public sector has defined benefit pensions where the amount is determined, so the employee knows how much they’re going to get,” he says. “The defined contribution pension scheme available in the private sector is basically a savings scheme.”
The main issue among local government staff is the proposal to increase employee contributions to the LGPS. Current contribution rates range from 5.5% to 7.5%, but these could rise by an average of three percentage points.
The government has agreed to protect those earning less than £15,000 from the increases, and for those earning up to £18,000 the rise would be “significantly reduced”. But unions say this could have a knock-on effect for those on middle incomes, including social workers, who might have to contribute more.
However, McPhail points out that employee contributions to the LGPS are accompanied by employer contributions of 14% to 25%, which in effect doubles the sum paid out at the end.
“If someone says, ‘I can’t afford 8%, so I’m going to opt out and put 5% in a smaller pension or the National Employment Savings Trust’, they’re dropping from 20% funding rate [combining employee and employer contribution rates to the LGPS] to 5%,” he says.
“It’s so catastrophic, the impact on your retirement provision will be so large, you might as well put it in a savings account or spend it on your kids now.”
THE PENSION PROPOSALS
Union bosses are engaged in a war of words with the government over proposals to overhaul the public sector pensions system. Neither side is prepared to back down, with ministers arguing that the current system is unsustainable and unions claiming there is an alternative to making staff pay more into their pensions, for longer.
Following intense negotiations, ministers agreed last week that the unique funding arrangements underpinning the Local Government Pension Scheme should be given special consideration. But it is likely that some of the broader proposed reforms will apply, such as:
● Public sector workers will be expected to retire later, in line with the state pension age of 65. This will rise to 66 by 2020.
● Pensions will be linked to the average salary someone earns over the course of their career, not their final salary.
● An average three percentage point increase in employee contributions will be phased in over three years from April 2012.
● Those earning less than £15,000 a year will not have to pay more, and those earning up to £18,000 will have their increase capped at 1.5 percentage points.
➔ Source: The Treasury
‘Changes are inevitable but severe’
Michael Earle (pictured) has been a social worker at Bristol Council for six years, and is a member of the Local Government Pension Scheme. He says:
“A pension wasn’t high on my list of priorities when I applied to work in a local authority, but it was in the back of my mind that it was there. It meant I could focus on doing my job, with a feeling of security.
“I think the changes the government is proposing are inevitable because savings have to be made, but they do seem a little severe. Having to increase your contribution and retire at a later age is a double whammy.
“People say the LGPS will still be better than any alternatives, but it comes down to each person’s circumstances, and whether they can afford the increased contributions. They may not want to leave the LGPS, but their pockets might not be able to stretch to staying.
“I haven’t looked into alternative options yet, but I will probably talk to my financial adviser, depending on how the reforms affect me. I’ll look at my finances, and see whether I can afford the increased contributions. People will be doing that around the country, so this could have serious implications.
“It feels like the recession is hitting us from all sides: first we were asking, ‘will I have a job?'; now it’s ‘will I have a pension?’.
“It’s additional stress and worry we don’t need.”
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How pension reform will affect Unison social care members
This article is published in the 7 July 2011 edition of Community Care under the headline “You’ll pay for it in the end”