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Going back to basics on state pension provision

Successive Governments have paid lip service to the notion of “simplicity” in pensions while gradually making things more complicated.

The Liberal Democrats propose a genuine simplification of pensions, with both the state and the private sector having an important and clearly defined role to play.

Our blueprint for pensions starts with the basic state pension as a genuine foundation.

Under both Labour and Conservative policies, the basic pension will wither and die. Labour has clearly signalled that future resources will go on the means-tested minimum income guarantee and the pension credit.

Through price indexation, the state pension will slowly fade out. This will be even more true under the Conservatives, who want young workers to opt out of the basic state pension altogether.

The Liberal Democrat approach is to begin with a substantial hike in the value of the basic pension.

Financed by a 50 per cent income tax rate on the slice of income over £100,000 a year, we would put £5 a week on the pension for the under75s, £10 a week for those between 75 and 79 and £15 a week for those aged 80 or above. These additions would not be means-tested.

As they are tilted towards older and, therefore, typically poorer pensioners, they would be better targeted than across-the-board increases.

In subsequent years, a new independent pension authority would advise the Secretary of State on the size of the state pension. It would bring into the public domain the latest data on pensioner incomes and pensioner poverty, the state of the Government&#39s finances and the level of earnings of those in work.

When times were hard, increases would probably be no more than inflation. But if pensioners could be shown to have been losing out, the increases would be bigger.

If such a body had been in existence in 1999, there is no way any Government could have got away with the 75p pension rise that went through in April 2000.

Beyond this, the state would over time withdraw completely from second-tier pension provision.

Starting with younger workers, the Liberal Democrats envisage that all people would eventually face a sim-ple choice – either join your company&#39s pension scheme, if there is one on offer, or take out a private pension.

There would be no third option. For those on low or no incomes, the Government of the day would need to make contributions on their behalf.

Membership of a scheme would be compulsory although the level of compulsory contributions would initially be set at no more than the current level of National Insurance rebates.

A move to fully funded second-tier provision could not happen overnight. However, ensuring that new generations of workers were all in a funded scheme would move pensions from being a minority interest to something far more people were aware of.

For example, if millions of under-30s had their own private pension, the media that serve this age group would be talking about the issue in a language they could understand.

Greater awareness coupled with annual pension statements – and maybe even instant statements through a hole-in-the-wall machine – might lead to much greater voluntary saving beyond the very modest compulsory level.

This long-term vision for pensions is distinctive both from the heavily means-tested Government approach and the largely privatised Conservative approach where even the basic state pension would be under threat.

We believe both the state and the private sector have their part to play in a new simplified and universal system of pension provision.

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