Lilley unveils his pensions revolution

The Government shook one of the main pillars of the welfare state last night as it announced plans to hand pensions over to the private sector.

The basic state pension is to be phased out over the next generation if the Conservatives stay in power, along with the State Earnings Related Pension Scheme, Serps.

The revelation brought a delighted reaction from the City, which stands to win massive amounts of new, state- subsidised business from the changes announced by John Major and his Social Security Secretary, Peter Lilley.

Mr Major denied that the announcement was designed as an electoral ploy, but he must hope it could encourage the same instincts among voters as the encouragement of home- ownership did during the 1980s.

"For years we have pursued a strong and consistent policy of encouraging personal ownership by individuals and families. It enables them to provide for themselves ... with self-reliance comes self-respect and greater freedom of choice," he said.

The plans, worked on by ministers over many months and agreed by the Cabinet on Tuesday, would not be completely in place until 2040. They would allow most of today's employees to stick with their present pension arrangements but would furnish anyone now in their teens or younger with a new Basic Pension Plus.

Each employee would have two pensions - a basic pension and a top-up fund, to which they could add extra, voluntary contributions if they wished.

Mr Lilley said the proposals would bring about the largest extension of personal ownership since the increase in owner-occupation. In 1950, five working people contributed to each old-age pension, he said, but by 2030 there would be three pensioners for every five workers.

Labour said the plans would lead to a huge public spending gap as the scheme was phased in. The Treasury would have to pay twice, funding existing pensioners while subsidising private pensions for those at work.

Gordon Brown, the shadow Chancellor, said that in the year before the first private pension-holders retired, the state would face an extra pounds 7bn payment.

"The tax and spending problem with the Conservative pension proposals is utterly basic: there are huge front-end costs which will run into billions of pounds and mean higher taxes for everyone. The question Mr Major and Mr Lilley have refused to answer is: how much?" he said.

Conservative sources said the equalisation of men's and women's retirement ages and 1995 reforms to Serps would save pounds 13bn per year and more than fill the gap.

The Labour leader, Tony Blair, added: "A vote for the Conservatives when Mr Major finally calls the election will be a vote for the privatisation of the state pension, a vote for more insecurity. And it will also be a vote for higher taxes."

The Association of British Insurers was enthusiastic . Its director general, Mark Boleat, said: "Individuals will have a real sense of ownership in their pension arrangements and be able to see much more clearly what provision they are making and how their pension fund is building up."

The Consumers' Association warned that the "appalling track record" of the private pensions industry could come back to haunt future governments.