Labour to adopt 'stakeholder' pension reform

Labour is poised to back funded second pensions as a replacement for the State Earnings Related Pensions Scheme (Serps). The move would provide growing numbers of workers, including the lower paid, who rely heavily on Serps, with their own stake in investment funds for their retirement.

The change reflects an increasing consensus, both in the pensions industry and, to a degree, politically, that second-tier pensions in future should be funded from savings, not from pay-as-you-go national insurance contributions.

But it will mark a sharp shift in Labour policy, which for 20 years has backed the retention and reconstruction of Serps, introduced by Barbara Castle in 1975 with cross-party agreement.

Chris Smith, Labour's social security spokesman, said yesterday that no final decisions had been taken. But in an interview with the Independent, he said: "There must be serious question marks about the long-term sustainability of pay-as-you-go models for second tier pensions," - where today's taxation or contributions pay for today's pensions and the money is not invested.

Since 1988, the Government has cut the final value of Serps by three- quarters, in part because of fears that with rising numbers of elderly in the population up to 2030, future taxpayers would not pay the additional pounds 50bn a year the full Serps pensions would cost.

"Any pay-as-you-go scheme is open to the predatory attacks of governments less sympathetic to the needs of a future generation," Mr Smith said. Funded second pensions with defined contributions producing a decent rate of return looked "ultimately a better approach".

Decisions would still be needed on whether to continue Serps for the present generation of members, to run a funded second tier for them alongside as an alternative, or to "try to transfer everyone into a new scheme with the absolute guarantee that they will be no worse off than if Serps continued".

Indicating that he would favour the latter if the transfer costs were acceptable, Mr Smith said the alternative to Serps need not be a single, national pensions scheme, privately run at arms-length from the Government, as advocated by this week's Retirement Income Inquiry. A better solution, he said, could be a range of competing funds where: "the Government sets the parameters and the private sector is involved in the development of the product".

In Australia, from where Mr Smith had just returned, intense competition within the private sector to run government- defined industry-wide pension schemes had produced "remarkably low" running costs of 1 to 2 per cent, he said - a lesson that Britain could learn.