Enlightened age needs a free market

Frank Field wants everyone to have a worthwhile supplement. Bravo! He wants a National Pensions Savings Scheme. Yuk!
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Last week Labour's Frank Field called for compulsory pension saving. Now the right wing responds

AGREEMENT is breaking out between left and right that the welfare state is not doing its job properly, that its future costs are unsustainable, and that radical change is essential.

Of course, we disagree on precisely what changes will work: about whether a new system should be compulsory or voluntary, private or public.But there is not much doubt that it should be funded, not unfunded.

Most politicians are saying little until this debate is concluded. The Tories lighten eligibility rules and scale down promised benefits. Even Labour doubts that universal benefits can survive, though it knows that means-testing them kills the incentive for people to save prudently.

Only Frank Field, Labour MP and welfare campaigner, says the unsayable. Writing last week in these pages, he says the basic pension will soon be worthless. Quite right. He wants to make sure everyone has a worthwhile supplement. Bravo! He wants it funded and not effectively a chain-letter, where you pay national insurance for years only to find your benefits are worthless. Very sound. Mr Field wants it compulsory. Well, maybe. And he wants it dominated by a single body which will set up a National Pensions Savings Scheme. Oh, yuk!

Only competition will power a universal pension system based on individual saving. It is fine to have some agency ensuring that people's savings in company or personal pension plans are adequate. But do we really want a nationalised pension fund for the rest? Better to have a choice of pension companies competing for our money, as in the successful system operating in Chile.

Of course, Frank does not trust private pensions. Who does? Final-salary schemes were designed with the boss classes in mind, but companies are now learning how costly they are. And personal pensions are just too easy to mis-sell.

If private pensions are to serve the millions, they must become transparent and simple. We need standard packages, just as we have in building society or bank accounts. We need benefits linked to contributions, not a final- salary fudge that can be manipulated by the powerful.

The debate is not between voluntary and compulsory systems. It is obvious we must require people to save enough to generate a minimum acceptable income on retirement. Otherwise, the prudent will simply end up paying the welfare bills of the rest. And we should restrict these basic savings to safe investments that are sure to generate the minimum pension we require.

No, the real debate is just how far we are willing to trust the market. For example, why retain a dwindling basic pension for us all? Why not give us the choice of staying in the state scheme or getting back a chunk of our national insurance contributions, provided we have a savings plan that will generate at least as much when we retire?

And why stop at pensions? Why shouldn't our savings plans put aside cash for when we are unemployed, or temporarily disabled, or pregnant? Why shouldn't they include insurance for the big-ticket items of permanent injury, hospitalisation or residential care? Why shouldn't we be able to borrow against them to buy a house or send our kids through college?

The Adam Smith Institute has a big project under way to explore how these packages - Personal Lifetime Accounts - could be made to work commercially and politically. Benefit fraud would be the first casualty - why cheat when you would be stealing your own money? - and the runaway demand for "free" public services would be curbed.

q Dr Eamonn Butler is director of the Adam Smith Institute, a free-market policy think-tank, and co-author of the ASI report "The End of the Welfare State".