Harman set to unveil second-tier pensions for low earners

Plans to bring the eight million who make no private pension provision within second-tier arrangements will form the centre piece of the Government's pensions review, to be published within two weeks. Pension providers are meanwhile urging the Government to privatise Serps, the state earnings-related pension scheme. Andrew Verity looks atv the options facing Harriet Harman, social security minister.

At a conference this week, Ms Harman said that the Government's proposals would be aimed primarily at the third of the working population, equal to 8 million people, who are blocked from saving for retirement because of a poor pensions regime.

Ms Harman told the City Forum conference on low-cost pensions: "The present system does not provide everybody with the opportunity to build a secure retirement.

"Across Britain there are millions of working men and women who are locked out of the non-state second pensions market because of intermittent or low earnings, part-time working and unstable employment. Doing nothing for these people is not an option."

Ms Harman and her deputy, John Denham, are set to propose a new category of low-cost, second-tier pension, to be called a stakeholder pension, following a consultation exercise which ended last week. The key criterion for the new pension is that it is cheap, allowing low-income groups to participate.

But the consultation has unveiled dramatic differences between pension providers, who are overwhelmingly in favour of full privatisation of Serps, and Labour's grassroots supporters, who insist it must be kept in state hands.

Under the present system, national insurance contributions pay for the basic state pension and Serps. If savers want a private pension, they can elect to have their national insurance paid into a private scheme which must guarantee benefits at least equivalent to Serps.

Private providers, including Standard Life, Norwich Union and Friends Provident, are pressing the Government to abolish Serps and replace it with private schemes including the new stakeholder pension.

By making private, funded schemes compulsory, providers argue that sales costs, which at the moment make up 46 per cent of the cost of pensions and eat up over half of the first two years' contributions, can be sharply reduced.

Standard Life claims a poll of 1,874 people conducted by Mori produced 53 per cent support for compulsory private schemes. Andrew Black, marketing manager, said: "People accept that compulsion may be necessary to make sure that saving for retirement is translated into reality. It is our view that compulsion will certainly be necessary if the Government is to achieve its aim of pension coverage."

The National Association of Pension Funds, which represents employer- sponsored schemes controlling more than pounds 300bn of assets, is urging that employers and employees pay a total of 10 per cent of earnings into a funded scheme.

The Engineering Employers Federation is pressing Labour to reverse a reform introduced in 1988 without which there would have been no pension mis-selling scandal. Under its proposal, employers could once again compel employees to join their own, in-house pension scheme.

Ms Harman said stakeholder pensions would be based on industry, occupation or locality and would have to be specially approved by regulators, or "kitemarked". They would have much lower charges than personal pensions and should not penalise people who move from one job to another.

While personal pensions were originally advertised as being portable between jobs, there are in fact heavy penalties levied on those who leave personal pensions for better occupational schemes.