Lilley defensive on pensions: Minister says basic state payment not enough to live on but is a 'brick' on which personal provision may be built

THE GOVERNMENT yesterday sought to quell the storm over the possible privatisation of the basic state pension - but Peter Lilley, the Secretary of State for Social Security, admitted that it was not enough to live on.

Amid a welter of denials and counter-claims over the privatisation prospect, Labour insisted that the Government's aim was to create a two-tier system with the basic pension relegated to a fall-back safety net.

Speaking on the eve of the first full week's campaigning in the by-election at Christchurch, where about one in three people are pensioners, Mr Lilley said the Government intended to maintain the basic pension as the building block on which people could build their own additional provision.

But he equally emphasised that those who failed to make their own extra provision have to turn to social security. 'If they're not able to (make additional provision) then they get extra help through the income-related benefits,' the Minister said.

Mr Lilley was forced to make the statement after a weekend report of a gradual privatisation scheme was first flatly denied by the Department of Social Security, then retracted and replaced with a statement neither ruling it in nor out.

Under the proposals said to have been under discussion in Whitehall circles, people in work below the age of 25 or 30 would continue paying National Insurance but would be allowed to opt out of the basic state scheme in return for an annual sum of between pounds 300 and pounds 800.

That concept appeared to be backed in a letter from Mr Lilley to all MPs which spoke of people making private provision, 'rather than' relying on the state system. Currently, private provision is only an addition to the universal state scheme.

Gordon Brown, Labour's economic spokesman, called on the Prime Minister to make a Commons statement clarifying the Government's policy.

But Labour's Frank Field, chairman of the cross-party social security select committee, provided the Government with some ammunition of its own with the coincidental publication of his proposals for universal private pensions.

Mr Field insisted his scheme was very different from anything the Conservatives would accept. Employers and employees would be obliged to pay, respectively, 6 per cent and 4 per cent of gross salary into a private scheme, while the state would have to make up contributions into private pensions for those not employed. A Guaranteed Minimum Pension would be at least 20 per cent above the current state payment.

Donald Dewar, Labour's social security spokesman, was unimpressed with Mr Lilley's 'building block' commitment: 'No-one in the Labour party wants a two-tier system with those who can afford it opting out and the basic pension relegated to a fall-back safety net provision.'

Questioned later on BBC radio's The World This Weekend over whether everyone who contributed could expect to withdraw something at the end of the day, Mr Lilley said: 'I can't envisage a system where we wouldn't have people, having made contributions, getting their pensions at the end of the day. I don't think anyone's got any such proposals.

'What we have got at present is a mixed system with the basic pension provided exclusively by the state and an earnings-related addition to that which people can opt out of and make their own provision.'

That appeared to suggest that a Government committed to examining change would not actually bring any change about, causing fresh confusion. While seeking to exploit the potential rift between Mr Field and the Labour front bench, moreover, Mr Lilley did not rule out consideration of Mr Field's scheme either. In Tokyo last week, John Major pinpointed the cost of pensions. While the Conservative manifesto commits the Government to maintaining and uprating the state scheme during the life of the current Parliament, the remarks were judged ill-timed by some Tories.

The Liberal Democrats plan to make massive capital out of pensions and spending cuts at Christchurch, along with value-added tax on household fuel. William Powell, Tory MP for Corby, said yesterday that unless the latter decision was reversed the Government could consider the Dorset by-election lost.