Sam Dunn: Shine a light on the dark art of pension forecasts

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The Independent Online

A glimpse of what our future holds usually costs a fiver, courtesy of end-of-the-pier mystics and fairground fortune-tellers.

Unfortunately, our fascination with even the faintest clue to our destiny can lead us to the strangest sources of information.

Yet there could soon be a rather more reliable, if less romantic, way to see into the future. What is it? A financial security blanket in retirement. What form does it take? The citizen's pension.

This one-size-fits-all scheme would make the complicated rules governing today's state pension entitlement, with its credits and means-tested benefits, much simpler.

Pensioners could expect a flat-rate guaranteed payment of £105 a week (at today's estimate of a "subsistence" income). If you want more than this in retirement, you'll have to do your own saving.

Instead of being based on our national insurance (NI) contributions, the payout would depend on a simple test of residency. New analysis from the National Association of Pension Funds (NAPF) suggests that such a scheme could be up and running within just six years.

The true value of this radical proposal is not in the actual weekly sums involved. Rather, it is the simplicity of the system, with pensioners able to rely on a guaranteed state payment when they stop working. Labyrinthine means-testing, handouts and fiendishly complex administrative systems will all be a thing of the past.

With this single payment as a savings benchmark, the hope is that people will then be encouraged to build up their own private savings on top.

As our article about women's pension provision on page 23 shows, there is no doubt that not just the state pension but the UK pensions industry as a whole is in dire need of an overhaul.

Millions are failing to put enough aside in private pension savings for their retirement, and even those who do are being let down by the rules governing pensions.

Workers at the car parts maker Turner & Newall who saved for years into its occupational scheme are in danger of losing as much as 70 per cent of their pension entitlement because of the company's insolvency.

As for the state pension, there's deep confusion about different entitlements. Some 1.5 million deserving pensioners miss out on pension credits through lack of awareness or fear of the administration. There is also an impenetrable second pension payment that makes up part of the basic state pension, known as S2P (formerly Serps). Knowing whether to "contract in" or "contract out" of the latter bamboozles highly paid financial experts, let alone the ordinary saver in the street.

There is a groundswell of support for the citizen's pension scheme from businesses, life insurers, the National Consumer Council and accountants - a rich mix of industry bodies that rarely sing from the same hymn sheet. This support comes despite the cost of reform - estimated to £5bn and rising - and the inevitable chaos such an overhaul would cause.

The scheme's residency test will have to be carefully considered, too, given the potential for exploitation. In New Zealand, where the concept of a citizen's pension has become reality, a modest payment is made to everybody who has lived in the country for at least 10 years. For five of these years, recipients must have been over the age of 50.

The citizen's pension was first mooted in the UK more than two years ago, but the idea has been slow to gain ground. However, along with the NAPF, the pension plan has a surprising new fan: Alan Johnson, Secretary of State for Work and Pensions, who has hinted that he is not averse to reform. He is also keenly aware that today's state pension discriminates against women.

But backing a citizen's pension would set Mr Johnson on a collision course with Chancellor Gordon Brown, the architect of today's morass of pension credit means-testing.

One can only hope that Adair Turner, the man charged with shaking up the UK pensions landscape and who is reporting back next summer, has pricked up his ears.

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