Link pensions to wages not prices

Back in March last year, shortly before the general election, the Conservative government tried to stave off defeat by announcing that future state pension provision should be privatised.

Not surprisingly, the voting public was not wholly enthused by this idea, which substituted a small but guaranteed retirement income with what would eventually become little more than an investment-determined lottery.

Labour, meanwhile, countered the Conservatives' proposals with its own Big Idea: the stakeholder pension. Under its sketchy proposals, a new layer of pension provision would be set up to include those who are not members of an employers' scheme. This system could be privately run and/or managed by community groups, trade unions or whomever, Labour believes.

That's all very nice and will no doubt lead to more calls among pensions experts for contributions to such schemes to be made compulsory. After all, the litany goes, the state simply cannot afford to pay for everyone's pensions in retirement.

I wonder what they will say to the publication of a report from the Pension Provision Group (PPG), set up by the Government to advise on how best to fund for retirement. The PPG report is not some lefty-liberal exercise: its working group of experts was chaired by Tom Ross, chief executive of Scottish Widows, a leading insurance company.

Yet the report argues that there is a growing division between rich and poor pensioners and that to link the basic state pension to inflation and not wages will further widen this differential. It follows that if this is so, compulsory contributions become marginal as a concept: after all, how are you going to be able to screw money out of people towards their pension if they barely earn enough to pay the rent? Moreover, what use are"matching contributions" as a means of incentivising retirement saving, when the most people have to set aside is a few pounds a month?

Ultimately, as this report recognises, there is no escaping a basic fact. No matter how good occupational pensions are for many, or how cheap personal pensions are becoming, or how wonderful stakeholder pensions will be, the basic pension will have to be upgraded. And to keep pensioners from destitution, there will have to be some links to wages not prices. Is anyone out there listening?

Anyone watching the behaviour of the FTSE 100 share index could be forgiven for feeling confused. Drops of more than 100 points, followed by minor recoveries, are now commonplace. It is too soon to know if this is the start of a so-called stock market "correction". But for those who are becoming jittery, we are launching a mini-series, starting this week on page 7, on how to develop a "defensive" investment strategy. Next week, collective investments and some tips from advisers. Happy reading.