YOUR MONEY; Savings or taxation? It's time to choose

TODAY'S working population might think that current pension provision is inadequate. But unless big changes take place, most of tomorrow's pensioners will get an even worse deal.

The value of the basic state pension is set to fall as a proportion of average earnings. Serps, the second, earnings-related state pension, has had the value of its benefits slashed twice. Coverage of company pension schemes appears to be stuck at around half the workforce. Most of the schemes have pensions based on a proportion of final salary. But almost no new final-salary schemes have been set up in the past few years.

Personal pensions, devised to fill this gap, still leave millions of workers without adequate cover. The pension industry stands charged with mis-selling personal pensions. Some of the culprits have gone out of business. Remaining companies will not only have to meet the costs of compensating for any mis-selling on their own part, but help pick up the bill for companies which have gone under.

The Government sees itself as a recruiting sergeant for companies selling these personal - sometimes called private - pensions. So far it has paid out pounds 14bn of our taxes to persuade people in Serps to withdraw. Every person leaving Serps for a personal pension gains a rebate towards the new pension. Yet more than half of those contracted out of Serps are not paying any additional sums into their personal pension plans. The resulting funds are largely worthless. Once the company has taken its fee, little is left in the pension pot.

A successful pension strategy must achieve two objectives. It must achieve universal coverage and the pensions must be adequate. The current strategy is flawed. Despite the bribes to people to leave Serps, large numbers of workers are still without a worthwhile second pension.

The debate is quickly polarising between voluntary and compulsory savings for these second pensions. The Government has nailed its colours to the voluntary strategy. Labour needs to offer the alternative compulsory approach.

Since economist Matthew Owen and I first put forward such a strategy in 1993, key opinion-formers have backed our approach. Labour's Social Justice and the Liberal Democrats' Wealth and Social Cohesion Commissions have signed up. And organisations as diverse as the World Bank and the National Association of Pension Funds have come on board. Compulsory savings schemes now operate in countries as diverse as Chile and Australia.

The compulsory approach has two main components. The first is to establish a Pension Corporation which will oversee the universalisation of second pensions. The corporation will be set the task of ensuring that every full-time and part-time worker is a member of a company or personal scheme, or a member of a National Pensions Savings Scheme, and that the level of contributions from employers and employees is adequate. The establishment of a National Pension Savings Scheme will be the Pension Corporation's second major task. The compulsory approach will win through in the end. These overwhelming advantages will see to that:

o Without compulsion the diligent will pay twice. They will save for their own pensions and then have to pick up the welfare bill for those who decide not to save.

o As we live longer but work less, more has to be spent on welfare if retirement incomes are to be adequate. Compulsory savings are going to be much preferred to the only other way of financing welfare, which is taxation.

The choice between taxation or savings becomes even more one-sided, as members of the National Pension Savings Scheme will be the owners of their own pension capital. Savers will be able to borrow against their own capital. A certain proportion will be available for activities such as the purchase of a house.

Tony Blair, in last week's conference speech, gave notice of his intention to back a second pension scheme for all. The key decisions on how to make that second pension both adequate and universal have still to be made by the Labour leadership.

o Frank Field chairs the House of Commons Social Security Select Committee and is MP for Birkenhead. He is a long-time welfare campaigner and author of 'Making Welfare Work'.