Rarely has the financing and structure of a pension scheme been debated so widely in public as with the Local Government Pension Scheme (LGPS) in recent weeks. Treasury proposals announced in October 2010 to increase contributions by £900 million have provoked a bitter response, even before Lord Hutton announced another set of changes

Local government, unions and pension consultants all weighed in to give their opposing views to the contribution debate that hinges around two issues. Firstly, how many of the 4.6 million members will opt out after being told to fork out extra contributions, set to average an extra 3% of local government pay. Secondly, what state the scheme would be left in after inevitable opt-outs.

Union GMB provoked much of the discussion by claiming that 40% of current members might opt out of the LGPS after the proposed rises. Brian Strutton, the GMB's National Secretary for Public Services told Pension Funds Insider: "In reality the actual figures could be a lot higher than that still, as when we asked our members to assume that low paid local government staff would be protected from the full effect of the increases 53% indicated that they would be opting out.

"We know this scheme is very sensitive with one in four local government workers having gone to the trouble to fill in opt-out forms prior to last year's announcement on contribution rises, so the results of our survey are not very surprising at all."

Strutton labelled Treasury figures that, on the contrary, suggest only 1% of LGPS members would be driven to exit the scheme by the contribution increases as "barking mad". A Treasury Policy Costing Document released with the recommendations in October stated: "It is possible that a small number of individuals will choose to leave their pension scheme as a result of these changes, though given the generosity of the schemes there is little economic rationale to do so, and policy will be designed to mitigate these impacts."

John Prior, Head of Punter Southall's public sector outsourcing team, believes opt-out levels are likely to lie between the two extremes.

He has disputed the GMB's claims of a mass exodus, stating: "When you ask a person if they would opt out given an increase in contributions it is easy to indicate so, but less easy to do when you are sitting with the forms in front of you and thinking ahead to your retirement."

Prior stated: "Whilst any increase in contributions is likely to be unpopular with employees, the majority are likely to conclude that they are better off staying in the scheme. This has tended to be the case in the private sector, where some of the few remaining "open" final salary schemes have increased employee contributions without any significant increase in opt-out rates."

He added that as a result Punter Southall "does not agree that increasing employer contributions by around 3% of salary would seriously undermine the future sustainability of the scheme".

Prior disputes claims made by the Local Government Association (LGA) that a moderate level of opt-outs might seriously affect the maturity of the scheme. The LGA's Chairman Baroness Eaton had argued in a public letter to the chancellor in February that with members closer to retirement age more likely to remain in the scheme after opt outs, there is a danger that equity holdings would be converted into bonds creating, reducing investment returns in a drive to shore up retirement incomes.

Baroness Eaton argued furthermore that a significant wave of opt-outs would prevent the Treasury's £900 million funding target from being met. Eaton suggested also that any drops in state funding to prop-up the scheme itself would be offset by a desire to recoup salary lost to pensions in pay negotiations and the provision of means-tested state retirement benefits for local government workers failing to build an LGPS pension pot.

She added that a provisional Department for Communities and Local Government proposal on the distribution of contribution rises threatened to enhance the number of opt-outs by leaving 'cliff-edges' meaning that sharp rises in contribution levels could leave some local government workers with lower net pay after a base salary rise.

Strutton argued that there was a groundswell of local government concern at the potential impact of a contribution hike, with the Greater Manchester Pension Fund and the Society of County Treasurers said to have also written to the Chancellor outlining their concerns, while the London Pension Fund Authority publicised concern that "treasury proposals can break LGPS before Hutton can fix it."

Hymans Robertson was consulted by the GMB to support their stark warning that massive opt outs could "kill" the LGPS. Jon Wright, Head of Public Sector Pensions at the group that manages around one-third of all the scheme's funds, said that there is a real danger of a damaging decrease in membership across all schemes and income levels.

"An increase in opt-outs could actually produce the reverse effect to that desired, with the funding gap filled by the public purse increasing due to lower contribution income," he said.

A big source of annoyance for the LGPS is that they are being asked to make a major structural change after implementing serious reforms as recently as 2008 that raised the retirement age and contribution rates of its members markedly closer to those of private sector schemes.

Wright lent support to the politically-sensitive view that the scheme would nonetheless remain comparatively attractive after a new wave of reform, saying: "Under current contribution rates, the cost to a member of paying contributions until retirement is greatly outweighed by the estimated lifetime value of the benefits secured at retirement. Although contribution rate increases will reduce this differential they are unlikely to eradicate it completely."

The GMB disputed the likely value of the scheme after the changes, with Strutton saying: "One in four local government employees don't currently consider the LGPS scheme to offer good value and an increase in contributions would not be attractive to members left with the option of paying higher proportions of pay for unstable and uncertain retirement benefits."

A consultation on the implementation of the proposed contribution increases started in the middle of February with the TUC meeting treasury officials including Paymaster General Francis Maude and Chief Secretary to the Treasury Danny Alexander. Unions are said to be confident that the Treasury will rethink the extent to which they are to burden scheme members with the extra contributions although fearful that it will be reluctant to compromise significantly on the £900 million contribution increase outlined in the Comprehensive Spending Review.

A HM Treasury spokesman told Pension Funds Insider: "The Government is committed to providing good quality public service pensions whilst ensuring long-term sustainability. This includes continuing with a form of defined-benefit pension and ministers are engaging with public sector unions to deliver the increases in employee contributions, recommended by Lord Hutton, in a progressive way."

dbillingham@wilmington.co.uk