Field rejoins pension war with proposal to pay out £7,000 each

Labour's rebel MP wants those who pay National Insurance to get the same as those who don't, writes William Kay

Frank Field is back on the warpath. Three years after he dramatically resigned from the Government, the veteran welfare campaigner will next week launch his all-party Pensions Reform Group's plans for a new universal protected pension (UPP).

It is designed to be a more comprehensive and fully-funded version of the state second pension (SSP), which is not due to supplant the state earnings-related pension scheme (Serps) until next April. Mr Field's will be paid for by raising employed people's national insurance contributions from 10 per cent to 15 per cent of income from the age of 25. That would provide a pot which, with the basic pension, should enable people to retire on a flat-rate pension equal to a third of average earnings, about £7,000 a year in present money.

But the element of compulsion will be a sticking point for many, as will the scheme's overt commitment to redistribution. Those who do pay National Insurance contributions will pay for those who do not, so everyone receives the same level of pension. "There is a cost to our proposals," Mr Field admits. "We are going to have to put more aside for them. The question is, what's the best way?"

The SSP is intended to provide a more generous additional payment for low and moderate earners, and people with a long-term illness or disability with broken work records. The Department for Work and Pensions says it will immediately allow 18 million people to start building bigger pension entitlements than they would have had under Serps.

But the MP for Birkenhead says that is not sustainable because, like most state pensions, it is being used on a "pay as you go" basis; today's pension is being paid for by today's workers. He wants a scheme ring-fenced and paid for by the eventual pensioners even if, as he concedes, it will take 40 years to grow enough to take over completely from the state pension.

"Governments have got to be taught that they cannot get their sticky fingers on a funded scheme – that was 20th-century thinking," says Mr Field. "But how do we get collective provision separate from the state? Nobody is going to buy Fifties socialism any more."

The UPP is an updated refinement of the scheme rejected so vehemently when Mr Field departed from the Government in 1998. Then he wanted to see a compulsorily-funded universal scheme to provide pensions, while escaping the stigma and disincentives to work involved in means-testing. He scornfully dismissed the present pension scheme by saying: "Jack the Lads who don't intend saving will benefit."

But Gordon Brown, the Chancellor of the Exchequer, launched a blistering attack on Mr Field's proposals, saying: "As guardian of the public finances, I must make sure money is well spent. I cannot just say that because a proposal has been made that involves billions of pounds of extra taxes, we will support it."

But Mr Field pressed on with a Private Member's Bill later that year then formed the Pensions Reform Group, which includes the Liberal Democrat MP Steve Webb and Howard Flight, the investment expert and shadow Treasury minister, as well as Kate Barker, a member of the Bank of England's monetary policy committee.

"We have talked about our plan with the National Association of Pension Funds, the Association of British Insurers and the Financial Services Authority," Mr Field says. "We want a six-month debate, and expect to redesign the scheme further. Any serious pension reform is complicated, so you do need to come up with something then fine-tune it. But we have also been talking to big occupational pension schemes who feel it's an impossible position, because we have never had an adequate first-tier pension. They have had to make up for that, and provide an adequate second tier.

"I don't think the basic pension has to be just the state retirement pension. Others say it should be raised substantially, but this is a time when taxation probably will be going up and you have got a significant proportion of money in pensions. We need a new scheme with adequate redistribution in it. The Government strategy on Stakeholder pensions, without saying it, was to get an adequate first tier.

"But the only function of government as far as designing pensions goes is the first tier. It's not to make individuals save huge amounts for their retirement. The ABI is working on this, too, and so should the other political parties. The Government will have to review its strategy, because if stakeholder is not first tier, they are in real problems. If you don't get basic pensions right, your reforms can only be thought of as partial, and could be harmful."

Mr Field has been highly critical of stakeholder from the start, particularly because it is targeted at the low-paid, many of whom do not have the spare cash with which to buy an extra pension. "Can it be voluntary?" he asks. "It must make the target group, earning £10,000 to £20,000 a year, wonder what's the point of saving, because they probably can't make themselves better off than the Government's minimum income guarantee provides, in terms of ensuring a minimum pension.

"So they will opt for the state second pension, which will become another version of Serps. Then the Government are biting their own tail. They are in a quandary about who stakeholder is aimed at. The target group is not buying huge amounts, but I cannot see how those at the bottom end could save enough without starving, in which case they will not need a pension anyway.

"The Government will have to admit this is not going to be the pension for most people. The spin will be that it will be 'a useful contribution'."

Gordon Brown's finances are liable to be constrained by higher public and defence spending, so the Government is unlikely to welcome a scheme to syphon off 5 per cent of a steadily increasing proportion of the population's income. Mr Field must hope, by the time the universal protected pension is in a final form, that his nemesis, Mr Brown, has not become Prime Minister.