Sam Dunn: S2P: surely they're taking the Sith?

S2P might sound like an android from the latest Star Wars film, but the only characteristic the state second pension shares with the George Lucas epic is scale. The confusion it generates among consumers is galactic.

S2P might sound like an android from the latest Star Wars film, but the only characteristic the state second pension shares with the George Lucas epic is scale. The confusion it generates among consumers is galactic.

A woefully neglected part of the state pension, S2P is at last moving into the spotlight, but it's dragging a host of difficult questions with it.

It all turns on the decision facing millions of people whether to contract in or out of the S2P scheme (formerly Serps). S2P is earnings-related and designed to bolster your basic state pension.

The choice sounds simple. You can either leave this payment alone and let it be based on the Government's calculations of your overall salary and national insurance (NI) contributions during your working life.

Or you can contract out and have a rebate paid into your personal or company pension where, the theory goes, it will grow beside your other pension savings. As you approach retirement, you will contract back in to avoid the risk of losing gains you have made over the years.

But making the right choice has not been simple. Problems began in the 1980s when, with go-go stock markets delivering healthy returns, it became the received wisdom that equities would provide more than a government- funded pension at retirement. Millions of workers duly contracted out, through their personal pensions or occupational schemes.

This also made sense for the Treasury because it would pay out less on pensions in the long term.

Fast forward to today and different economic conditions prevail.

Along with falling rebates, calculations by a growing number of actuaries - those number crunchers whose job it is to work out the cost of our ever-lengthening lives - suggest you're probably better off contracting back in to S2P instead of spending most of your working life outside it.

This is giving two different sets of workers a headache. Should those who have contracted out during the past 17 years or so now contract back in, or should they stay outside the state scheme until they retire? And what about those taking out a pension now?

The problem is that so many workers are affected. Some 12 million have contracted out of S2P - mainly through their company schemes, although about a quarter are in personal pension or stakeholder schemes.

Those with the latter can at least make the decision more easily than those in a company scheme, where it usually takes a decision by trustees to switch everybody back in.

Key to the issue is how much of a difference contracting back in will make. Everybody's circumstances are different and much will depend on your earnings, your age and the type of scheme you're in.

You might think of turning to an independent financial adviser for help but you'll probably get limited assistance. Many are reluctant to say whether you definitely should contract in or not - simply because there is no expert consensus in the industry about whether to do so.

This state of affairs prompted the Association of British Insurers (ABI), whose members run billions of pounds worth of our pension money, to publish a consumer factsheet last October. This was intended to help savers make their minds up, or at least encourage them to take advice.

However, the ABI factsheet has fallen foul of Which?, the consumer body. Which? claimed the information it contained was insufficient, given the complexity of the problem.

Many insurers have since written directly to millions of their policyholders, suggesting that it would be in their best interests to contract back in. But the response has been muted. Now some companies have begun to take matters into their own hands and act on behalf of pension policyholders.

Norwich Union announced last week that it would automatically switch 40,000 customers who had bought a pension directly from it back into the state scheme. The "changing economic environment" lay behind its decision, it said. The insurer is now pressing ahead with the conversion of these 40,000 of its 270,000 personal pension and stakeholder accounts (the others were largely bought via independent financial advisers or company schemes).

Six months ago, Norwich Union sent out a mailshot, advising customers to contract back in. It fell on deaf ears. The company expressed disappointment that "a surprisingly" low number - one in five - had bothered to respond.

Norwich Union's ingenuousness is more surprising. Pensions are complicated beasts - Adair Turner's marathon report, examining possible solutions to the long-term savings crisis, reflects this.

And when even professional advisers won't give a definite yes or no about contracting in or out, what hope do the rest of us have of coming to an informed decision?

As trust is eroded between savers and the institutions that sold them pensions and other complicated financial products, it's no wonder that customers' silence speaks volumes.

s.dunn@independent.co.uk