Radical plan for two-tier state pensions

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A radical plan for a two-tier pension scheme is due to be unveiled this week as pressure grows for reform of the provision of retirement income.

After a two-year study, the Retirement Income Inquiry is expected to recommend tomorrow a safety net state pension backed up by a top-up scheme with compulsory minimum contributions from employees and employers.

Publication of the independent inquiry's report coincides with a survey showing that millions of Britons of working age have no idea what their pension is likely to be.

And yesterday Frank Field, the Labour chairman of the Commons social security committee who has proposed radical reform of the welfare state, warned that people should be made to set aside 15 per cent of their income for pensions.

Writing in the Sunday Mirror, he said increased saving was the only way to get round public resistance to paying higher taxes to maintain pension levels.

"We are spending fewer years at work, retiring earlier and living longer. We will have adequate pensions only if we set aside more of today's income for tomorrow," he said.

The Retirement Income Inquiry was set up under a former Treasury mandarin, Sir John Anson, amid concern about how to fund the pensions of a rapidly ageing population.

The number of people of working age for each person of pension age will have fallen to 2.7 by 2030 from 3.3 in 1991. At present basic state retirement pensions for some 10 million people cost pounds 26bn a year, but by 2030 the basic pension is forecast to cost pounds 42bn a year.

Sir John's committee - drawn from business, consumer groups, trade unions, the City and the pensions industry - is expected to recommend all pensioners should be guaranteed a state-backed minimum income in retirement through a new assured pension. Pensioners whose income was below the minimum would receive extra payments from the state.

Employers and employees would also be required to make at least minimum contributions to an individual's pension fund, either through a company scheme, personal pension or a new national scheme.

The need for a public debate on pensions was highlighted by the publication yesterday of a survey by the insurer Eagle Star, a leading provider of retirement income schemes.

It showed fewer than half the people over 18 (46 per cent) had any idea of the pension they could expect in retirement.