Personal Finance: The Government's new pension plans will inevitably complicate the pension scene

THE GOVERNMENT'S new pension plans, published this week, will inevitably complicate the pension scene, which is crying out for simplification.

Existing entitlements will remain, and it will take at least half a century before the transition from the current system to the new one is complete.

But if we accept that SERPS, the existing second state pension, is unsustainably expensive, and a substantial number of people will never trust the existing personal pensions system because of the persistent bad publicity over high charges and the way in which they were mis-sold, then reform was unavoidable.

But is this the best way forward? The Government plans to introduce a new second state pension (SSP) to replace the state earnings-related pension (SERPS) for anyone earning less than pounds 9,000 a year in today's money.

It will be extended to carers and will rapidly introduce a minimum income guarantee (MIG), which will be indexed to national earnings, to preserve its value and reduce the number of state pensioners dependent on income support to top up their pensions. It will cost the taxpayer more, but it will tackle a serious social problem. So far, so good.

The proposals will not directly affect occupational schemes provided by employers. But the Green Paper introduces a new privately-funded low- cost stakeholder pension, aimed primarily at everyone earning between pounds 9,000 and pounds 18,500 a year in current money who does not currently have a pension. It will however compete with existing personal pension schemes.

Crucially the Government has rejected the idea, favoured by Frank Field of introducing a compulsory pension plan which would provide a private pension for everyone who does not have a company pension scheme or a personal pension.

To argue that the poorly paid, the disabled and the carers could not afford a mandatory pension misses the point. The taxpayer would have to make their contributions just as the taxpayer will have to pay for the proposed second state pension which will replace Serps.

Instead, the Government has decided to rely on a combination of further tax incentives and national insurance rebates, to tempt those people who currently have no private pension entitlements either to join their employer's scheme if one is on offer, or to take out a stakeholder pension which will be simple to understand, and have low management charges.

The incentives will be supported by a persistent publicity campaign to try and frighten non-joiners - who have so far resisted the pressure to take out a personal pension - into taking out a stake-holder pension instead.

Employers will be expected to encourage all their employees either to join the company scheme or take out a stakeholder pension and shoulder extra administration costs (such as deducting contributions from the payroll), but they will still not be obliged to contribute either to personal pensions or the new stakeholder pensions.

The continued absence of an employer contribution must increase the real risk that many people who could contribute to a pension plan will still decide not to do so, and will rely on the state to take care of them when they are old.

Ironically, there is also a real risk that new stakeholder pensions could compete so effectively with existing personal pensions that established providers - and the army of salesmen and financial advisers who help to sell personal pensions - will find themselves forced to reform or quit the business.

There will also certainly be some hidden snags, especially for people whose fortunes change, for better or worse, in mid-career, for the long- term unemployed, and for those who would like to switch from personal pensions to stakeholder pensions, but have already paid heavy up-front charges.

Delays to starting the stakeholder pensions for another four years also give too many people a perfect excuse to delay a decision.