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Last Updated: Thursday, 25 May 2006, 15:14 GMT 16:14 UK
Get-out clause may undermine pension reform
Analysis
By Ian Pollock
BBC personal finance reporter

In his foreword to the Pensions Reform White Paper, Tony Blair calls his government's proposals a "bold blueprint".

John Hutton
John Hutton included a crucial get-out clause

But a get-out clause included in Work and Pensions Secretary John Hutton's speech to MPs could partly undermine this claim.

He said a precise date for re-linking the basic state pension to earnings, rather than inflation, would only be announced at the start of the next government.

And as if to emphasise the point that such a policy is not quite set in stone, he added it would be "subject to affordability and the fiscal position".

This had been the central concern of Chancellor Gordon Brown, who initially opposed Lord Turner's proposals.

Mr Hutton promised that the earnings link would "in any event" come in by the end of the next parliament - 2015, at the latest.

But it is possible to interpret his affordability caution to apply even to that date.

In either case, the practical effect is to introduce a level of uncertainty, that was certainly not in the mind of Lord Turner.

And if the earnings link were delayed, that would in turn trip up the government's stated ambitions to turn the second state pension into a mere top-up payment so as to halt the further spread of means testing for pensioners.

Surprise bonus

Pensioners campaigning for more compensation because their occupational schemes went bust before 2004 have got a surprise bonus.

Although Lord Turner did not address this issue, the government is beefing up the scope of the Financial Assistance Scheme.

This was created to help those workers whose insolvent pension schemes collapsed, or were closed, before May 2004.

The protection offered to them is much less generous than that given by the Pension Protection Fund, which covers pension scheme collapses after that date.

Indeed, hardly anyone has yet received an FAS payout.

But the scheme will now be improved, with a further 30,000 people being brought within its scope.

The maximum payout of 80% of basic pension rights will be paid to those who, as of May 2004, were within 15 years of their scheme's standard retirement date, rather than the three year cut-off that currently applies.

Not quite the NPSS?

The government clearly still has not yet decided if it wants to sign up - lock, stock and barrel - to Lord Turner's ideal of a government-administered National Pension Savings Scheme.

The plan was given strong backing recently by the House of Commons' Treasury select committee.

Although the government likes the basic ideas - including automatic enrolment and compulsory contributions - it is not sure exactly how this new system of personal pension accounts should be organised and invested.

Insurance companies and pension providers in the financial services industry wanted a bigger role in the plan.

So now there will be more consultation over how to handle the new business that will be generated if - as the White Paper predicts - between 6 and 10 million people eventually sign for up this extra savings vehicle.

Fewer National Insurance contributions

One of the biggest changes being proposed is to slash the number of years for which someone will need to make National Insurance contributions before qualifying for the full basic state pension.

Although the White Paper doesn't put it this way, the message is simple: save or work

That target currently stands at 44 years of contributions for men and 39 for women.

For both sexes that will come down to 30 years of work or caring for a relative.

The aim is primarily to help women to stop work to look after children or relatives but it will also apply to men.

However, the reduction will introduce an apparent anomaly.

Just as people are being told they will have to wait longer before receiving their state pension, they are also being told they will have to contribute for fewer years in order to earn it.

People are bound to start asking why they should still make NI contributions - possibly for more than 50 years - when their entitlement to the state pension has been fully earned after just 30 years.

Save or work

Behind the government's claims to fairness, simplicity, and affordability lurks another big idea: compulsion.

The plain fact is that the main thrust of the government's policy is to force people to do things they are not willing or able to do at the moment - save more and work longer.

That is because even an enhanced basic state pension will still not be very generous compared to the pensions available in many other countries.

The carrot to save more is the offer of tax relief and employer contributions in the new NPSS, or whatever version the government finally adopts.

The stick is the gradual withdrawal of state pension benefit until people are in their very late 60s.

If the government gets its way, then over the next 40 years or so more and more people will come to regard 68 - or maybe even later - as their target retirement date.

And if they want stop working earlier than that, they will simply have to rely on their own savings and investments to live on.

Although the White Paper doesn't put it this way, the message is simple. Save or work.




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