• Government announces pension reform largely in line with Turner report
• State pension age rising to 68 from 2044 and amount will reflect earnings
• New structure welcomed by opposition, business leaders and trade unions

Key quote
"The message is this: if you want anything more than the basic pension in retirement, the state isn't going to do that any more. You have to do it yourself." - LORD TURNER

Story in full A GENERATION of workers were told yesterday that if they want to retire on anything more than the bare minimum, they must work longer and save more towards their own pensions.

Unveiling the blueprint for pensions over the next 50 years, the government effectively offered the guarantee of a more generous, but still modest, state pension, in exchange for staff taking more responsibility for funding their own retirement.

Anyone who is aged 48 or above will be largely unaffected by the plans, but others now face major changes in how they prepare for old age.

Presenting the plans to parliament, John Hutton, the Work and Pensions Secretary, said the intention was to create "a new pensions savings culture where future generations can take increasing personal responsibility for building their retirement savings".

Opposition parties, the pensions industry, business leaders and trade unions all gave a broad welcome for the new structure of pensions in Britain, which is based heavily on Lord Turner's independent Pensions Commission report.

For both men and women, the state pension age will rise to 66 from 2024, then to 67 from 2034 and finally to 68 from 2044.

In exchange, the basic state pension will rise in line with average earnings, though only if Gordon Brown, the Chancellor, judges it to be affordable. Those increases are due to start in 2012, but many still fear Mr Brown could delay or scrap the move. Heightening those fears, Treasury sources last night described the 2012 date as "optimistic".

In his report earlier this year, Lord Turner warned that without major reforms, three in four pensioners could be dragged into Treasury-driven means-tested pensions benefits. Mr Brown has now accepted that the share of pensioners who face means-testing will, in future, be capped at 40 per cent.

In another key plank of the reform package, state pensions will mostly cease reflecting workers' contributions, with the State Second Pension (S2P) becoming a capped flat-rate system similar to the Basic State Pension.

The Conservatives have claimed that would see average earners hit with a "stealth tax," paying in the same amount but getting less in return. Lord Turner said yesterday that was "wrong", as average earners would see a net benefit from the reforms, notably from the rises in their basic state pension.

As the state moves away from providing contributions-based pensions, the government will push people towards saving their own money into their own retirement accounts. From 2012, all workers who do not choose to opt out will get a personal account as part of the National Pension Savings Scheme, which will be managed by commercial investment firms charging lower than normal fees.

Four per cent of workers' salaries will be channelled into the personal account, employers will pay 3 per cent and the government will give another 1 per cent in tax relief.

Despite initially warning that compulsory employer contributions could force many firms into bankruptcy, Britain's largest business group, the CBI, last night gave a cautious welcome for the package.

"At the very least the government must commit to a package of financial support for small firms to help them adjust and absorb the additional costs," said Digby Jones, the head of the CBI, estimating that employer contributions could cost firms £2.3 billion a year. By contrast, the direct cost of the new pensions scheme to the government could be smaller. The Pensions Commission calculates that its proposals will add only £2.1 billion a year to government spending on pensions, with most of the additional funding for the new measures coming from savings on the basic state pension, the state second pension and the planned equalisation of male and female retirement age.

Lord Turner said: "The message is this: if you want anything more than the basic pension in retirement, the state isn't going to do that any more. You have to do it yourself." He estimated that the government had accepted "about 90 per cent" of the commission's recommendations.

Perhaps the most significant Turner proposal ministers chose to reject was to base eligibility for a state pension on residency in Britain, not financial contributions.

That would have been a major boost to women who take time away from work to care for children and relatives.

Instead, the contributions system of eligibility will be maintained, but the number of years of contributions required to qualify for a full state pension will be reduced from 39 to 30. Women will also find it easier to count time spent at home caring towards a pension entitlement.

"Much of what we have heard so far is good news for women, but these measures alone will not protect all women from poverty in retirement," said Katherine Rake, the director of the Fawcett Society.

The pensions white paper that Mr Hutton presented to MPs yesterday is the result of months of wrangling between Tony Blair, the Prime Minister, and Mr Brown, as well as lengthy private negotiations with opposition parties and interest groups.

That meant that opposition parties' objections to the government plans were largely restricted to the details.

Philip Hammond, the Conservative pensions spokesman, said Mr Brown could yet capsize the deal by blocking the boost in the basic state pension.

"In these proposals there is guaranteed pain, in the form of increased state pension age, but without the guaranteed gain," Mr Hammond said.

For the Liberal Democrats, David Laws said the government was not doing enough to reduce the spread of means testing.

Last week, the Pensions Policy Institute, a think-tank, estimated that even with the reforms implemented, 45 per cent of pensions will still be liable to means testing.

Both the Conservatives and Liberal Democrats accepted that the broad framework outlined yesterday will command public confidence and, crucially, persuade younger workers that it is worth their while to start saving.

One of the few dissenters in parliament was Frank Field, the former Labour pensions minister, who argued that the government had squandered an opportunity to make more fundamental changes towards an "investment-based" pensions system and dramatically reduce the scale of means-tested pension credits.

And campaigners speaking for existing pensioners expressed regret that more had not done more for them.

"This white paper has delivered a win for future pensioners, but is off the mark for today's," said Gordon Lishman, director general of Age Concern.

Compensation plan welcomed

CAMPAIGNERS last night gave a cautious welcome for promises of more compensation to workers whose occupational pension schemes collapsed.

The Financial Assistance Scheme (FAS) was set up in 2004 to provide limited help for more than 80,000 workers whose companies went under, taking their pension schemes with them.

Among the workers affected were employees of United Engineering Forgings in Ayrshire and Richards Group in Aberdeenshire.

The government yesterday said that the cash available for the FAS would be increased from £600,000 to £2.5 billion, and promised that it would make it easier for former workers to qualify for money from the scheme.

But despite the government's promises, the scheme has paid out to fewer than 100 workers, and official figures show it has spent more money on consultants and administration than it has handed over to pensioners.

In the Commons yesterday, Frank Doran, the Labour MP for Aberdeen North, who represents many Richards pensioners, said that the government must still address "serious problems" with the scheme.

And Community, the trade union representing former staff at AWS, the biggest firm whose pension collapsed, said it was still not satisfied.

"While we welcome the extra funding and recognise that this Labour government is attempting to clear up the mess caused by previous administrations, it does not go anywhere near to meeting the needs in retirement of our members," the union said.

The things that you need to know

Why is there a pensions crisis?

Because people are living longer. In 1950, a 65-year-old man was expected to live another 12 years. Now, the average is 19 years, rising to 24 by 2050. There are also more elderly people to support than there have been in the past.

What is the government going to do about it?

It has decided a combination of three things must be done if the crisis is to be resolved. First, people will have to work longer. Second, they will have to save more. Third, the government will have to put more money into the state pension.

That doesn't sound very easy. What if we do nothing?

Eventually, there will not be enough money to go round, and millions of people will spend their final years in poverty.

OK, so how long will I have to work?

That depends on how old you are now. If you have already celebrated your 46th birthday, you can still retire at 65. That increases to 66 for those aged 39 to 45, 67 for thirty-somethings and 68 for those under 29.

What will the government do in return?

Everyone will still be entitled to a basic state pension, and from 2012 the government has promised to increase its value at a faster rate. Currently, it rises in line with inflation - about 2 per cent a year - but it will soon increase in line with average salaries - about 4 per cent.

I've heard there is a second state pension. What is that?

That is what you get in return for making national insurance contributions. It comes on top of your basic pension and is linked to how much you earn.

Will that stay the same?

Only until 2030. In that year, the second state pension will be switched to a flat-rate sum - just like the basic pension.

If the second state pension is going to be switched to a flat rate, it sounds like higher earners are going to lose out.

Yes, they will. It is thought that everyone earning more than £25,000 a year will receive a lower second state pension than they would have if nothing had changed. Some will consider this an extra tax.

So, if the better-off are losing out, is there more being done to help lower earners?

At the moment, the government offers a third level of pension to low earners. However, it is means-tested and has been criticised in the past for being a disincentive to save. People think that they can get more money from the government if they save less, so they do nothing. To counter this, the white paper proposes that fewer people will be eligible, the target being 30 per cent of the population.

Who is benefiting most from the reforms?

The big winners are carers and mothers. If you can demonstrate that you aren't working in order to look after someone else, you will qualify for credits that count towards a state pension. These exist already, but the new reforms will make them far more generous.

So, will I be forced to save more?

Not forced, but greatly encouraged. The state pension is not nearly good enough to support you through your old age, so you will need a personal pension on top of that. The plan is to create a UK-wide pension scheme in which all employees will be enrolled. You can opt out of it if you want, but the thinking is that most people will be too lazy to bother.

What will that pension scheme mean to my salary?

You will have to contribute 4 per cent of your earnings into the scheme, while your employer will have to put in 3 per cent. The government will contribute an extra 1 per cent.

So, I'm enrolled in a scheme, and have agreed to work longer in return for a more generous basic state pension. Will that be enough?

Sadly, no. It is thought that average earners require about two-thirds of their salary to see them through retirement, but the white paper's reforms are estimated to account for only about 45 per cent of what's required. Everyone will still need to put away more in savings if they are to feel comfortable with their retirement provision.

The new proposals are a result of months of behind-the-scenes wrangling between Tony Blair and Gordon Brown, the Chancellor, discussions with opposition parties and other interest groups. Picture: Getty

Source: http://news.scotsman.com/index.cfm?id=778072006

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