The big idea has missed the target

MONEY TALK

They may have been described as a political big idea, or even a welfare state revolution. But the Government's proposals last week to privatise the state pension scheme are unlikely to transform the Tories' election prospects.

That fact alone makes the proposals a bit academic - what Labour plans is likely to be more important. But in the absence of a concrete alternative from Labour (and as a warning shot in case they plan something similar) it should also be stressed that the proposals do not address the UK's most urgent pension problems.

The idea of the proposals is to provide more certainty of an acceptable - if not luxurious - standard of living in retirement, but only really for those now at school and university, who will be due to retire in the middle of the next century.

They won't help those already retired, nor most of those already working - particularly those late in their careers realising they are about to suffer a significant drop in income when they retire, and those in mid- career wishing they had started a pension earlier. For these people the proposals offer no reassurance of a decent pension, nor any incentive to save more.

What the next generation of workers is being offered is a tax-free pension worth pounds 175 a week in today's money, replacing the basic state pension and the earnings-related state pension, or Serps. Importantly, for the first time this new pension would be funded by actual investments rather than by government promises.

For someone retiring now with a full National Insurance contributions record the basic state pension plus Serps is worth a total of around pounds 170 taxable. In theory this should continue to rise in line with inflation for those in work yet to retire. But even if that proves the case - and the danger is that future governments will pare back entitlements - there is still a need to have other money put aside, particularly if retirement occurs before these pensions become payable.

So the proposals' big failing is that they do nothing to encourage us to make more provision. Indeed, many people may be put off doing more for themselves, just because the Government is talking about solving pension problems.

A really radical proposal would have been to require people to save an additional proportion of their income in a pension run by their company, or privately. Compulsory pension saving could even cut costs because firms could spend less on getting people to buy at all. But the problem with a compulsory system is that it would mean a reduction in take-home pay, and would be seen as another form of taxation.

Pensions also need to be simpler and more accessible if more people are to buy them. The privatisation proposals stand to create more confusion because they would run alongside the existing system until well into the next century, instead of replacing it outright.

The Government should be given some credit for addressing a long-term problem - the growing cost burden of an ageing population on those in work. But, ironically, something more immediately radical is needed. The hope is that the Labour Party's failure so far to come up with counter- proposals reflects that it has a more radical hidden agenda, even if it does involve unpalatable solutions such as compulsory extra saving.

Pensions, main section, p23