John Denham: The unions must wake up before it is too late

This is the opportunity to show they speak for people. There's every chance it will be missed

Are unions up to the pensions challenge?

Pensions look set to dominate the TUC Congress this week and union-Labour relations for this Parliament. The failure of private-sector final-salary schemes, attempts to revise public sector pensions and growing awareness of the inadequacy of the state pension has proved a potent combination. Pensions have leapt from the enthusiasm of a few policy specialists to a mass concern of working people.

Government pensions strategy is up for grabs. The Turner review will to report shortly. This could be great opportunity for unions to show they really speak for working people, members or not. But there's every possibility the chance will be missed.

Of course, unions will respond to the proposed revision of public-sector pensions. For the first time in years, their public service members are demanding to be led. But neither public-service pensions, nor traditional final-salary schemes in the private sector, are available to the great majority of people at work. A campaign based solely on what worked best in the past will not be enough. The movement needs to throw its weight behind fresh thinking on the best ways to provide decent pensions for all.

In some areas, the unions are ahead of the game. Their long-standing demand for a decent basic pension is part of the emerging consensus being put to Turner. Only a decent state first pension worth around the current Minimum Income Guarantee (just under £110 per week) can slash means-testing in retirement. Without it, millions of people will find that saving for a second pension will not make them better off but will simply save the Chancellor money on benefits.

One problem is that union movement has not been realistic about how better state pensions could be funded. The Government is wrong to refuse any increase in tax or National Insurance as the population grows older, but understandably it doesn't want to load everything on to new levies.

Unions need to support the growing call to look again at how money is currently used to support pensions. National insurance rebates into private pensions could be used to improve the basic pension. More fundamentally, the bias in tax relief towards the better off is simply not justifiable. Every year at least 0.5 per cent of GDP goes to just 2.5 million top-rate taxpayers, when so many people on or below average incomes have completely inadequate second pensions.

The most difficult challenge is to rethink union strategies for second pensions, however. It will be too expensive to build a better second state pension on top of a new better basic pension. Traditionally unions have approached private pension provision with demands for more regulation and increased compulsion on employers.

But demands for ever greater regulation have had unintended consequences Ever more onerous regulation is covering fewer and fewer scheme members as employers give up on the better schemes. Employer compulsion is not a simple solution either. As any feasible rate would be set well below the contributions made by the best employers, compulsion could encourage a reduction in contributions.

The biggest threat to second pensions is not duplicity or dishonesty of employers but the heavy downward pressure on costs in a competitive economy. A radical pensions strategy would meet union concerns while working more closely with the grain of the better employers. This would involve changes to the balance between personal and collective responsibility for pensions, and to regulation, so that good pension providers gain a competitive advantage.

This won't be possible while market competition encourages companies to compete by under-cutting pension costs. It is particularly important to stop agency-based "self-employment" being abused by contractors to avoid pension costs and so drive down pension provision across great swathes of the economy.

A fairer labour market would sit well with greater personal responsibility to make pension contributions. Reform of tax reliefs would allow the development of a matching scheme where additional employee and employer contributions would attract matching funds from the state.

Some minimum level of employer contribution might be needed, but the emphasis would be on rewarding and strengthening the relationship between employer and employee. Because pension benefits play little part in recruitment, employers have little incentive to improve their provision. It would reward good employers if all jobs had to be advertised, by law, at a combined pay and pension values, instead of headline salary alone, as I will be proposing in the next session of Parliament.

Successful reform depends on realism about the costs and how they are met. If pensions really are deferred pay, as we in the labour movement has always argued, the unions need to lead their members in a serious debate about what part of future incomes should go into pension contributions. In a labour market which supported and rewarded good employers, the trade unions could play a crucial role in encouraging voluntary contributions and joining with employers to manage funds.

We know that pension problems will be discussed a lot this week. But will the union movement put itself at the heart of the solutions?

The author is a former Pensions Minister