The state should pay a basic pension of 40 per cent of average earnings from age 68 but should have no role in the design of private pension products, says the Adam Smith Institute.
The right-wing thinktank says a substantial state pension would remove the need for today's heavy and expensive regulation of private pensions, transforming private provision from its present role of surrogate privatised welfare to that of marketplace product. The UK's current basic state pension is equivalent to around 15 per cent of national earnings, up to 20 per cent with means-tested benefits.
The report, by Watson Wyatt partner Alan Pickering, who headed the Government review of pensions, calls for a change to offer access to the workplace to individuals, regardless of age, arguing that changes in savings patterns alone are not a sustainable response to increased longevity.
The report describes the Inland Revenue's simplification plan as offering a “genuine incentive” to new pension saving because of the increased maximum tax-free cash. But it argues that if further tax incentives are to be offered, they should be aimed at employers which contribute into work-based schemes rather than direct to staff.
The report says the problem with the UK state pension system is that it is not generous enough rather than too generous, as is the case with many other developed countries. It calls for a dramatic increase in the basic rate of the state pension. By 2008, the basic and second state pensions should be amalgamated and contracting out abolished.
Pickering says: “No longer can we afford to pension off workers in their prime. Encouraging training and allowing older people to remain economically active will not only benefit them but will also make it easier to plug the retirement gap.”