Cabinet rejects statutory pensions

THE GOVERNMENT has rejected plans to force the eight million workers not saving for their retirement to join a compulsory new pension scheme.

Alistair Darling, Secretary of State for Social Security, will announce next week a wide- ranging package of "strong incentives" to encourage people to provide for adequate income in retirement. The 6.5 million employees and 1.5 million self-employed not in company or personal schemes will be urged to take out new government-backed "stakeholder pensions".

Mr Darling's "carrot and stick" approach could include reduced national insurance payments for those who start the new pensions and "benefit penalties" for those who deliberately choose not to put money away for their old age in the hope of relying on the state.

The Government's long-awaited Green Paper on pension reform will disappoint Frank Field, the former minister for welfare reform sacked in July. He proposed a compulsory-for-all stakeholder scheme that would have redistributed money from the rich to the poor by forcing the well-off to subsidise the contributions of those on low incomes.

But Tony Blair, Gordon Brown, the Chancellor, and Mr Darling feared the Field blueprint would have been seen as a backdoor tax hike. They feared that would tarnish New Labour's hard-won reputation for being "trusted on tax".

A compulsory system was supported by some senior officials at the Treasury and Department of Social Security. But Mr Darling has decided it would be unworkable as it would have "perverse effects". For example, it would provide only a meagre return for people earning less than pounds 9,000 a year. Many workers with little cash to spare would have had to find more money, but would still have had to rely on state handouts when they retired.

The Green Paper will include measures to head off criticism that without a compulsory system the low paid would have no incentive to save for retirement as they would know they could rely on income support. But people who could not afford contributions to the stakeholder scheme would be protected by a minimum guaranteed pension from the state.

Nearly all those earning more than pounds 20,000 a year already save adequately for their retirement, so Mr Darling believes that forcing them to put away more money through a compulsory scheme would be "needless taxation".

Mr Darling's target will be the key middle group earning between pounds 12,000 and pounds 20,000, many of whom could afford to put more cash away.

He will warn that half of today's workers will be destined to rely on social security in retirement unless they join the new scheme. "A lot of people are in for a shock," a source said yesterday.

Mr Field is expected to criticise the Government's approach, warning that the poor and unemployed will be excluded from the stakeholder scheme. But Mr Darling will announce measures to prevent those earning low incomes from relying on means-tested benefits in old age.