National Association of Pension Funds chairman Lindsay Tomlinson says the threat of a mass opt-out from the Local Government Pension Scheme due to an impending 3 per cent contribution rise does not bode well as the Government prepares for automatic enrolment.
Speaking to Money Marketing following the NAPF-funded Workplace Retirement Income Commission’s first evidence session last week, Tomlinson pointed to predictions of local government staff abandoning defined-benefit pensions as evidence of the challenge facing the Government ahead of the 2012 reforms.
Research from GMB suggests a 3 per cent contribution rise, labelled the “Osborne Pension Tax” by the public sector union, will see up to 53 per cent of LGPS members opt out of the scheme.
Tomlinson said: “If you look at what is happening in the local government pension scheme, it is not very encouraging for auto-enrolment.
“The Government wants members to contribute 3 per cent more to stay in what are till very generous pension arrangements but for a lot of members it looks like that 3 per cent will be the last straw that broke the camel’s back.”
The most pressing challenge facing auto-enrolment policymakers is to persuade people to save 8 per cent of salary – which will be phased in between 2012 and 2016 – but Tomlinson fears the minimum Nest contribution of 8 per cent will be viewed as a ceiling rather than a floor.
He says: “One of my concerns is the 8 per cent contribution rate for Nest because people will see it and think the Government is saying that 8 per cent is enough. But 8 per cent is not enough, it is a compromise and people need to pay more. Eventually, we need to convince people of that, but the current task is to persuade people to save the 8 per cent in the first place.”
With the Government focusing on the defined-contribution Nest scheme and many employers, including the NAPF, closing their final-salary schemes, the demise of defined benefit appears inevitable. However, Tomlinson said there is still a “debate to be had” about the future role of DB provision. He said: “I am under no illusions about the decline of DB in the private sector, but there is a question of whether we can arrest that decline or whether we should just accept the DB model is past its sell-by-date.
“I would like to think one of my achievements in my term at the NAPF is that I am now able to acknowledge there is a debate to be had over DB versus DC. A few years ago, if the NAPF chairman had said that they would have been shot.”