New pensions scheme to be 'radical'

ALISTAIR DARLING, the Secretary of State for Social Security, will this week unveil the Government's long-awaited plans to ensure people make adequate financial provision for their retirement.

Since taking over the difficult welfare brief in July, Mr Darling has spent much of his time tiptoeing through the minefield of pensions reform as he sought to put flesh on the very bare bones of the "stakeholder" scheme promised by Labour.

Mr Darling, who is due to unveil his Green Paper tomorrow believes he has produced a package which is "radical, affordable and credible". But it will not be radical enough for some because, after much agonising, the Government has rejected the idea of forcing people without a personal or company pension to join a compulsory stakeholder scheme.

Mr Darling is frustrated that the pensions debate has been dominated by the issue of compulsion. This is due largely to the persistence of Frank Field, who resigned as minister for welfare reform when Mr Darling got the top job at the Department of Social Security.

Mr Field wants a universal scheme, believing the rich would be happy to subsidise the contributions of the poor. But Mr Darling believes this would be seen as a backdoor tax hike on the well-off and insists the Field blueprint is unworkable.

"Compulsion is a one-club policy," one senior government source said yesterday. "We need a more sophisticated approach which meets individual needs and gives people choice."

Mr Darling's scheme may be seen as compulsion in all but name. He planned a "carrot and stick" approach to ensure people realise it is in their financial interest to take out a pension. For example, workers who choose not to provide for their old age even though they could afford to will face lower state benefits in retirement than the genuinely poor. This is designed to tackle Mr Field's criticism that, without a compulsory system, people have no incentive to provide for themselves because they can rely on the state's safety net.

The Green Paper will contain a stark warning for today's workers, half of whom will have to live on income support in their old age because they have inadequate pension provision. Today, 2.5 million pensioner families live on less than a third of average earnings, giving them an income of less than pounds 120 a week. The number will double by the year 2025, because 8 million workers are not saving for their retirement.

People need second-tier pensions because the value of the state pension is declining. If the Tories had not stopped uprating it with earnings rather than prices in 1979, it would now be worth pounds 87.85 for a single person and pounds 140.60 for a couple, instead of pounds 64.70 and pounds 103.40 respectively. Although demands by pensioners groups to restore the link with earnings are supported by some Labour MPs and grass-roots activists, ministers will refuse to find the billions needed. They point out that Britain's 10.5 million retired people already receive benefits totalling pounds 3.5bn - a third of the welfare budget - and say they want to target extra help at the poorest among them.

Mr Darling may therefore extend a new guaranteed minimum pension, which will ensure an income of at least pounds 75 a week for every single pensioner and pounds 116.60 for a couple from April. A key target is the 1 million old people who do not claim the income support to which they are entitled.

But critics claim the scheme is not all that it seems; retired people with other income, such as an occupational pension, will not receive the top-ups, but only the basic state pension.

Mr Darling also indicated yesterday that the Government had rejected plans to end the tax relief on pension contributions for higher rate taxpayers.