Tories plan to privatise pensions

Plans to reform radically the pensions system by abolishing the State Earnings Related Pensions Scheme are believed to have been drawn up by the Cabinet in the hope that they will boost the Government's general election chances.

The move will surprise opposition politicians. Although they had suspected the Tories were planning to scrap the scheme, Peter Lilley, the Secretary of State for Social Security, said only a few months ago that he believed it had a future. Now ministers have apparently seized on the idea, believing it could win votes.

Under the proposals, everyone would be encouraged to build up their own schemes for retirement instead of relying on the state. Under the existing arrangement, the basic state pension is topped up by Serps, which is linked to pay.

Senior Cabinet ministers are believed to have agreed the scheme yesterday, amid conditions of tight security. If the Conservatives win the general election, they are expected to make a commitment to look at the changes during the next Parliament.

The move comes amid mounting concern over the cost of social security. The Government estimates that if Serps is not reformed it could cost pounds 18.7bn by 2030, more than nine times the present expenditure.

Serps, in its present form, was hammered out between the main parties in the 1970s to allow people to top up their basic pensions. It derives ultimately from the first compulsory contributory state-run pensions introduced by Lloyd George in 1911, which was extended by the Attlee government after the Second World War.

It was one of the key planks of the Beveridge reforms. Because this is a simultaneous system - the contributors are not saving for their own pensions, but funding today's pensioners - Serps is vulnerable to an ageing population.

This kind of ``unfunded'' scheme has resulted in a pensions scheme regarded as miserly and incapable of dealing with the problem of poverty in old age.

Both main parties have struggled with the dilemma of how to reform Serps. Labour's Frank Field has suggested a shift to a state-sponsored insurance system. The big problem for Mr Lilley will be to explain how the gap in funding would be closed as Britain shifted to a new system - and to give a timescale.

Last night Mr Field, chairman of the House of Commons Select Committee on Social Security, said he supported the abolition of Serps but believed it should be replaced with compulsory savings schemes for all.

"I think it should be wound up, but all the calls that have been made have been resisted. The scheme was being continually run down and it is a bad deal for people to be in," he said.

The Conservatives will have to overcome suspicion among pensioners who remember the fiasco of the late 1980s, when government inducements to persuade nurses, miners, teachers, steelworkers and others to shift from occupational schemes resulted in insufficient pensions for up to 350,000 people.

The legislation was ineffective in stopping the mis-selling of certain private pensions. In 1995 the Personal Investment Authority estimated the cost of compensation might rise to pounds 3bn. One of the ministers responsible for that failed 1986 legislation was John Major.