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Dream scheme

The Labour Party is looking Down Under for the model of a stakeholder pension fund system
Worrying about a pension was not exactly trendy in the optimistic Eighties but in the Nineties it is a subject no one can afford to ignore. Even the happy few whose financial future is already secure should be concerned about how the rest of the population should be provided for.

Pension policy covers the future of the state pension, which is becoming increasing inadequate as it is left behind by average earnings; the fate of Serps, the state earnings-related pension scheme, which is becoming increasingly expensive to sustain out of tax receipts; the role of company schemes of every kind from final-salary-linked schemes to money-purchase, and the best way of providing pensions for those whose current schemes are inadequate or non-existent.

Conservative policy is at least clear. The state pension will be raised in line with prices but will be left to lag behind earnings. Serps is safe for a few years but benefits will start to shrink early in the next century. Labour's policy does not look much more generous in spite of Lady Castle's spirited efforts to restore the link between the state pension and earnings, but they are still thinking.

Last week a TUC conference on the future of pensions was offered some insight into ways by which a Labour government might tackle the issue of second-tier pensions.

Notwithstanding the view put forward by Professor Alan Walker (co author of the Fabian Society paper `The future of pensions, Revitalising National Insurance') that the current system could be made to work, the consensus seems to be that a funded system where the contributions of each member build up a fund to provide their own retirement benefits should be put in place and largely replace Serps.

This Government's policy of encouraging people to leave Serps and move to a personal pension has had some disastrous consequences and has tainted the whole idea. But it still seems that the best way of providing "second- tier" benefits in retirement will be through a funded scheme which moves the whole issue from the area of social security to that of financial services.

Harriet Harman MP, Shadow Secretary of State for Social Security, set out the Labour Party's proposal for a stakeholder pension which combines the universal cover and state approval that underpins Serps with the investment and management skills of the financial services industry to create some large industry-wide funded schemes which could, in turn, take advantage of the economies of scale that such large funds should command.

Members would have the advantages of a funded scheme with its ability to make inflation-beating investments. Also, because the schemes would be run by the financial services industry, other benefits, life cover, long-term care etc, as well as pension payments could be funded. It would also give the financial services industry an opportunity to rehabilitate itself but within the confines of a tightly defined and government-approved scheme.

The key to success would be a combination of cost efficiency and education to ensure that members made sufficient contributions to fund the benefits they desired. There is strong evidence that, in the trend of occupational pension schemes to move from defined-benefits to defined-contributions basis, members are not putting in enough to meet their own retirement expectations.

The stakeholder pension is not a new or untried area. The concept of a simplified funded scheme available to all those working in a particular industry, no matter by whom they are employed or even if they are self- employed, has already worked. There have been a small number of such schemes in the UK but with limited impact, and (in some more recent examples) funded only from Serps opt-out payments.

In Australia, a number of such schemes have already been established. With only about 50 per cent of the workforce in the 1970s and 80s able to take advantage of occupational schemes, and with women being particularly at a disadvantage, the Australian government and trade unions negotiated a wages and pensions accord which established multi-employer pension schemes, commonly known as "industry super funds." The first such fund established in the building industry in 1984 has now grown, as planned, to 260,000 members and some $1.25bn (pounds 600m) of funds under management. The Australian government offered the management to the financial services industry and saw some strongly competitive bids, which has kept costs down. Charges are not "front-end loaded" and workers moving between industries can take their "super fund" with them to another industry-wide scheme without penalty. There are 80 such schemes in Australia, with 4 million members, all offering simple money purchase funded benefits with insured risk benefits. The target is for 12 per cent contributions including 3 per cent from employees plus additional contributions from government variable with the member's earnings.

There are some major differences between the Australian and UK markets but it is upon the tried and successful Australian model that Labour hope to establish a funded second-tier pension scheme to replace Serps and, by keeping the management in the financial services industry, avoid any future government diverting the funds designated for pensions to some other more current purpose.

For those who would not even be eligible for the new scheme, carers at home, those unable for one reason or another to work, Labour's programme would include a citizenship scheme whereby those who could would divert a small part of their capability to provide second-tier pensions for those who could not. This would particularly benefit women who tend to dominate these categories