An increase of public-sector pension contributions could lead to a mass opt-out from pensions by staff, warns the head of the Local Government Association (LGA).

In a letter to George Osborne, Baroness Margaret Eaton cautioned that a “significant level of opt-outs” from the Local Government Pension Scheme (LGPS) was likely if contributions were raised by 3.2 per cent.

Coming at a time of pay freezes and job losses, the pensions hike was also “likely to lead to a significant worsening in industrial relations”, said Eaton, the Conservative chair of the LGA.

Her letter, published by The Observer, said that an exodus of workers from the LGPS – which has 3.5 million members and assets of over £130 billion invested in the UK – would call into question its “sustainability and viability”.

It was announounced by the Chancellor in last autumn’s comprehensive spending review that contributions for the six million members of public-sector pensions schemes would rise, in a move that would save the Treasury £1.8 billion per year by 2014-15.

Workers earning up to £31,500 are expected to be hit with a 3.2 per cent increase, but the proportion is expected to be more for those in higher salary brackets.

Exact details of the contribution hike – which will be phased in from April next year – will be revealed after Lord John Hutton delivers the final report of his Independent Public Service Pensions Commission next month. But he is said to believe that an average rise of 1 per cent would be advisable.

A Treasury spokesperson said: “The government is in discussion with stakeholders, including the unions, about implementation of this increase with a view to protecting the lowest paid.”