Monday, 7 March 2011

LGPS - Opting Out to Oblivion

Today's Financial Times has a worrying report about increased opting out from one the UK's largest public sector pension scheme because workers are feeling the pinch due to rising cost of living: The FT reports that the number of workers opting out of the Greater Manchester Pension Fund, the nation's largest public sector scheme, has risen by more than 50 per cent in the past year, even before the effect of higher contribution rates takes effect.

The trend will worry the government, coming ahead of this week's publication of the final findings of Lord Hutton's public sector pensions review, and indicates that ministers may struggle to close the gap between what is paid out in benefits and taken through contributions.

Mo Baines a UNISON representative on the Greater Manchester Pension Fund reports...
"Opt outs in the scheme have gone up by over 50% from 750 to around 1250 employees this year this is alarming as fund contributions decrease. The loss of new or existing scheme members will impact on our future investment strategy.

"It’s the spare cash we invest to make the returns so there will be less of it and income will fall putting pressure on us to keep contribution rates down. The biggest challenge now is that if the government proposed increases to contributions goes ahead this will mean that the fund will simply see a further jump in the numbers of opt outs. We have done some modelling on the impact of the changes”

“If the government cut 3% off cash settlements on the basis that this will be met by the increased member contributions there will still be a shortfall – which could be made worse by the numbers of opt outs increasing – but predominantly made worse because the Manchester scheme is 69% female members with around 37% part time so the hike in contribution for higher earners will be met with opt-outs.

"On a salary of £24,000 the impact of the 3.2% hike will mean at least £800 per annum more is payable in pension contributions and for those earning more the hit gets harder – as these are ‘cliff edge’ arrangements it is not difficult to see higher earners either demanding more to compensate or wanting payments in kind rather than a pay rise”

“Despite the recession our fund level is so good because we have driven down fees to fund managers we have internal fund managers plus very low administrative costs. This could all drastically change though if these higher contributions are forced upon us. The impact of what is left to invest could be sliced by a third which means the returns drop and therefore valuation drops which puts the costs up even more because we have to close that gap"

Its all adding up to a perfect storm of conditions that could threaten the viability of the scheme. We wait with baited breath for the Hutton report to see if he has anything to say that will positively help the situation.