Who can we trust with our gold?

Personal pensions have had a lousy press. But for most of us they are still the best hope of security

Will Marks & Spencer do for our pensions what it has done for our eating habits - or maybe our underwear? By coincidence the news yesterday that M&S was going to launch personal pensions coincided with the announcement of compensation costing up to £3bn to the 350,000 people who left their companies' schemes when they were sold personal pensions by the regular life assurance companies that turned out to be inappropriate to their circumstances.

This juxtaposition raises a host of questions. Is it an instance of a new and respected entrant about to impose higher ethical standards on a somewhat tarnished industry? Why did those giant life assurance groups, some with hundreds of years' experience of selling pension policies, manage to make such asses of themselves? Can we now be sure that the regulation of pensions is properly constituted? How can we know whether our present pension provision is adequate? And why are we now being urged to buy our own pensions, rather than having them provided by our employers and/or the state?

The best way into this jungle is to start with that last question, and to answer it with two words: demography and job mobility.

In the next 50 years, the ratio of people of working age to those drawing pensions will inevitably fall. It already has fallen: in 1960 there were more than four people of working age for every one pensioner; now there are about 3.3; by 2040, when the present twentysomethings will be drawing their pensions, there will be 2.4 workers for every pensioner. So the mathematics behind the basic state pension - by which each generation of workers pays the previous generation's allowance - becomes increasingly adverse. Any future government, even with the best will in the world, will find it hard to maintain a generous basic state pension scheme, given these uncomfortable demographic facts.

The position of state employees will be better protected, for some groups have a funded scheme: that is, money is being set aside in a separate pot to fund their pensions. But expect the present generous system of pensions for many other civil service workers to come under increasing pressure.

If demography puts pressure on state pensions, job mobility makes it much less safe to rely on employers' pensions. These come in two forms: those in which the pension is based on a final salary (called final salary, or defined benefit), and those in which it is based on the size of the pot of money set aside from salary by employer and/or employee (called money purchase or defined contribution).

The idea of a pension based on a percentage of final salary sounds wonderful, until you consider that only a tiny minority of people work for the same company all their lives. Most do not even reach conventional retirement age, and instead are made redundant or "given" early retirement. So we have a system of pensions based on people serving for 40 years in one company, when the average length of service is about eight. Not only do the favoured few benefit at the expense of the less fortunate many, but a lot of people who would rather like to retire early are locked into their jobs by their pension plans.

The alternative form of company pension, that based on money purchase, has fewer disadvantages, for it is easier to transfer funds from one scheme to another, but the final value of the pension does depend on a satisfactory investment performance by fund managers, and it denies employees the choice of investment manager that a completely portable personal pension would provide. And, crucially, many firms are prepared to pay contributions into their pension fund but refuse to make the same payment into an employee's personal pension.

So, intellectually, the idea of a personal pension, which people can take with them as they move jobs, put on hold while they leave the job market to retrain or start a family, and then take up again when they are back in work, fits the new reality of the workplace far better than any company-based pension scheme. There are glitches still: at retirement, most of the pot has to be converted into an annuity, rather than being gradually run down as it is needed, or invested so that the capital can be passed on to children. But the Government is about to make further legal changes that will tackle some of these problems. The concept is a good one.

But if the idea is worthy, how on earth did the pension providers manage to make such a hash of selling these products?

Sensible commentators believe at least half the blame should be placed not on the companies but on the new system of regulation under which they were forced to operate. Until the mid-Eighties, the selling of pension plans and life assurance was a haphazard affair, with some policies being sold directly by the companies that produced the schemes, others by agents who in theory would offer a range of plans and advise on the most suitable but in practice tended to sell those plans which paid the highest commission. (A voluntary commission agreement that limited these payments was, ironically, scuppered by the Office of Fair Trading in the late Eighties.)

The whole system should have been reformed by the 1986 Financial Services Act, which required anyone selling a life assurance policy or a pension plan to offer "best advice". But the commission issue was not tackled. The result was predictable: anyone selling a plan had a legal requirement to do one thing and a commercial incentive to do something else. Faced with the clash between the law and the market mechanism, it is hardly surprising that the market often won.

The Government, in its eagerness to promote personal pensions, turned a blind eye to the imperfections of its new regulatory system, while companies eager to jump into the new market were less than scrupulous in the standards to which they trained their sales staff or policed their agencies.

The final bill for this misbehaviour landed only yesterday, with the Personal Investment Authority's requirement that the pension providers make large compensation payments. This is all a crying shame because ordinary people will draw the wrong conclusions. Many will assume that personal pensions are by their nature a worse system thancompany ones, whereas they may only be so because the company refuses to pay into the personal pot as much as it would into the company-run scheme, or because the employee is one of the few who does happen to serve until regular retirement age. Worse, even people who have no option of joining a company scheme may be discouraged from taking out a personal pension. The plain truth is that the uncertainties in the job market and the role of the state over the next generation are such that the only safe choice is for people to make their pension their own responsibilty.

So we must learn from this mess.Companies should be compelled to pay the same amount in pension contributions whether an employee chooses to be in a company scheme (of whatever type) or an independent one. Retirees should be free to run down their pot of savings, or not, as they wish, or to convert all or part of the pot into an annuity at a time of their choice, rather than on a specific retirement date. And everyone should be encouraged to buy a series of different retirement plans, so that they have spread the risk of less-than-perfect investment by the company selling them their plan. Initial charges on those plans should be cut.

Which is where M&S comes in. I don't know whether St Michael has a hotline to the angels and will produce the investment performance of the century. But I am confident it will be competent, as are the vast majority of the established financial institutions. It may be hard to see much synergy between knickers and pensions, but then there is not much synergy between knickers and Chicken Kiev. I believe, however, that it is very hard to put too much aside for retirement. We must save more. People should use their full tax allowance or, failing that, set aside as much as they can afford. If that is good business for M&S, then it is good news for our whole society.