Call for action on pensions 'time bomb'

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Public Policy Editor

Radical proposals to tackle the pensions "time bomb" were called for yesterday by an independent inquiry.

A new guaranteed minimum pension would be introduced. If pitched at pounds 73.50 a week for a single person, pounds 15 higher than the present basic state pension, it would involve a net cost of between pounds 1.5bn and pounds 3bn a year, providing help to the least well-off pensioners.

The State Earnings Related Pension Scheme (Serps) would be phased out and replaced by privately-run funded schemes with compulsory contributions. These would be either existing occupational and personal pensions or payments into a new national pension scheme run independently of government and likely to be particularly attractive to the lower paid.

The changes would involve existing workers and employers paying twice. Initially they would have to find an extra 0.5 to 0.7 per cent of earnings as they fund the remaining commitments in Serps while investing for their own second-tier pension. Two factors force the change, according to the Retirement Income Inquiry, which was chaired by Sir John Anson, former second permanent secretary at the Treasury, and funded by the National Association of Pension Funds.

First, there will be a sharp drop next century in the ratio of people of working age compared to pensioners numbers - down from 3 to 1 to 1.6 to 1 - making tax funding of pensions increasingly difficult. And the least well-off are becoming increasingly reliant for their pensions on complex, unpopular means-tests which are expensive to run and penalise those with small savings while failing to provide an adequate income, the inquiry said. Its recommendations mirror some of the proposals put forward by Labour's Commission on Social Justice. But they also pick up on ideas for funded second pensions supported by Sir Norman Fowler and Sir Keith Joseph, when they were Secretaries of State for Social Services.

Moving from Serps, paid for by current National Insurance Contributions, to schemes in which people owned their own fund may produce greater willingness to contribute, the inquiry argued. In time, it would reduce the competition for tax funding between pensions and other social programmes such as health and community care.

The package produced cautious political reactions. The Department of Social Security welcomed it but said detailed study would be needed before conclusions could be reached, while Labour refused to commit itself to any of its particular proposals or costs. Age Concern welcomed the report's "pragmatic approach".

The inquiry rejects on the grounds of unaffordability the "popular" idea of restoring the basic state pension to its 1979 level, arguing that it would cost an immediate pounds 6.6bn, the equivalent of 3p on income tax, and pounds 50bn by 2030. Restoring the value of Serps, is rejected on similar grounds. Instead, the basic state pension should remain, still linked only to prices but topped up to provide an assured pension which would rise with earnings, protecting pensioners' living standards.

9 Pensions: 2000 and Beyond. Report of the Retirement Income Inquiry. Vol 1: Report: pounds 5.50; Vol 2: Analysis of Options, available from Shelwing Ltd, Folkestone, CT20 2BL; pounds 10.50.