A long-awaited Green Paper said that the state earnings-related pension scheme (Serps), for those without company or personal pensions, would be replaced by a new "state second pension".
Alistair Darling, the Secretary of State for Social Security, told the Commons that up to five million people would benefit from the biggest change to the pensions system in 25 years. A person earning pounds 6,000 a year, who would currently receive pounds 13 a week from Serps, would receive pounds 46 a week under the new scheme.
The scheme would also boost the pensions of 2.5 million carers - mothers who take a career break after having children, and those looking after sick or elderly relatives. Parents of 200,000 disabled children, and 1.5 million long-term disabled people with an interrupted work record would also benefit.
The scheme is aimed at those who earn less than pounds 9,000 a year but ministers also hope to encourage middle-income groups (earning between pounds 9,000 and pounds 18,500) to take out "stakeholder pensions", which would be Government- backed but provided mainly by the private sector.
"Our long-term ambition is that everyone earning more than pounds 9,000 a year should be in a secure, funded, private pension," said Mr Darling. Stakeholder pensions would be more secure and flexible, and of higher quality than existing private pensions.
The Government is to spend pounds 500m a year - a total of pounds 5bn over 50 years - to encourage middle-income earners without pensions to join a stakeholder scheme by giving them larger National Insurance rebates. This would enable a worker on pounds 12,000 a year to increase their pension income by pounds 1,000 a year.
Stakeholder schemes are due on the market by 2001. The Government plans by about 2006 to increase financial incentives for those earning over pounds 9,000 a year to join one. If they remain in Serps or join the state second pension they will be worse off.
But Mr Darling rejected the idea of making the new system compulsory. "I believe these incentives are fairer and more effective than increasing compulsion," he said. "I do not think it is the Government's job to make life harder for the person on pounds 12,000 with two children and a mortgage to pay. I want to help middle earners, not penalise them."
The Minister said that forcing low earners to save would not guarantee them an adequate pension, as they could not afford the contributions, while it would be "perverse" to order the well-off to save more than they needed. The issue of compulsion for the self-employed would remain under review.
The Government will encourage the one million employees who opt out of company schemes to sign up. Firms will be allowed to make joining a condition of employment unless employees can show they will be better off taking out another scheme.
If the Government did not act now, Mr Darling said, one in three of today's workers would be forced to rely on Income Support in retirement.
Despite the injection of taxpayers' money through higher rebates, the state share of the nation's pensions bill will decline in the long term, as people make more provision for themselves. Now 60 per cent comes from the Government and 40 per cent from individuals - a share-out that Mr Darling promised to reverse.
"Everyone who can save for their retirement has a responsibility to do so," he said. "In turn, the Government has a responsibility to provide security for those who cannot save enough."
Mr Darling said his radical, affordable scheme would reduce the number of pensioners relying on means-tested benefits. But for today's pensioners, the Government would bring in a minimum pension guarantee in April, which would give 1.5 million pensioners almost pounds 400 a year extra. It would be worth pounds 75 a week for a single pensioner, and pounds 116 for a couple.
This would, in effect, build Income Support payments into the basic pension, but it would not be payable to those with other income - such as from company schemes.
Mr Darling said that he hoped the minimum pension would be increased in line with earnings rather than prices in the long term.
He pledged that the basic state pension - which increases to pounds 64.70 for a single person and pounds 103.40 for a couple in April - would remain, and would not be means-tested. But it would continue to rise in line with prices rather than earnings and so would decline in value.
The Minister said that it would cost pounds 30bn to restore the link between the basic pension and earnings, which was severed by the Tories in 1979. This would give money to better-off pensioners who did not need it while the poor would be better protected by the guaranteed minimum income.
Examples from the Green Paper:
1. Man starts work at 16 as pounds 6,500p.a. mechanic. From age 40 has short- term jobs; goes part-time at 60. No private pensions.
Current income: state pension of pounds 49 a week.
New system: state pension of pounds 82 a week.
2. Female graduate, takes pounds 14,500p.a. insurance job. After marriage stops work to raise three children. Returns at 35, earning pounds 12,000 and retires at 65.
Current income: state pension pounds 32, personal pension pounds 65. Total pounds 97 a week.
New system: state pension pounds 42, personal pension pounds 74. Total pounds 116 a week.
3. Man leaves college at 20, becomes lab assistant. Joins multi-national, retires at 60 on pounds 15,000 salary and company pension.
Current income: state pension pounds 32, company pension pounds 119. Total pounds 151 a week.
New system: state pension pounds 32, company pension pounds 134. Total pounds 166 a week.Reuse content