By David Willetts Shadow Work and Pensions Secretary

The government has instead made a difficult situation worse David Willetts

Although Labour have made many mistakes, the crisis is not entirely their fault. The closure of final salary schemes to new members is partly a response to changes in the labour market, for example.

Improvements in longevity are another factor. But this makes it all the more important that governments get right the things they do control.

Sadly, the Government has instead made a difficult situation worse.

The notorious stealth tax on pension funds in 1997 has taken �5bn a year out of our pension funds. That adds up to around �25 billion already. It has had a disastrous effect on the finances of our pension schemes.

Encourage people to save

The pensions crisis will mean that millions of British people who are currently working will receive an income in retirement far lower than they hope or expect.

At the moment incentives are not improving; they are deteriorating David Willetts

The real challenge is how best to help people avoid a massive fall in their income the moment they retire.

The best way to respond to the challenge is to encourage people to save more. That means better incentives to save. But at the moment incentives are not improving; they are deteriorating.

Our pension funds are taxed in a way they never were before and there are worrying reports about yet further reductions in the tax incentives for people to save.

Means-testing disincentive

At the same time the spread of means-tested benefits means that people who save may be no better off as a result of doing so.

So savers are caught in a double-bind with the prospect of higher taxes on their savings and more penalties through the loss of means-tested benefits as well.

The real problem in Great Britain is that retirement age has been getting earlier and earlier

We have suggested a reform of benefits for pensioners.

Instead of the extension of means-testing through the Pension Credit, we proposed that money should instead have been put into a higher rate of pension for older pensioners.

Older pensioners tend to be poorer - on average pensioner couples aged over 75 have an income �80 a week less than couples just over state pension age - so this would be well targeted on poverty without more means-testing.

We have also come up with an imaginative Lifetime Savings Account into which people can put money in the good times and which attracts a Government contribution in an escrow account.

They can withdraw the money on a rainy day, but will only get the benefit of the Government's contribution if they put the money back before they reach pension age.

If we don't save more, then the second option is for people to work for longer

We are consulting with the financial services industry on the idea. We envision it as a framework within which the financial services industry is able to offer a range of products that will offer a boost to savings.

If we don't save more, then the second option is for people to work for longer. But there is an important difference between pension age and retirement age.

The Government controls the pension age but it doesn't control retirement age. And the real problem in Great Britain is that retirement age has been getting earlier and earlier.

One of the factors behind this has been the design of final salary pension schemes and the obvious temptations for employers to make older workers redundant and put them as a charge on the pension fund.

Waste of talent

It is worrying that such an unusually high proportion of the over-50's who have lost their jobs have also been members of final salary pension schemes.

Members of occupational pension schemes on above-average earnings are up to 50% more likely to leave their jobs in their 50s than people with the same earnings who are not in a pension scheme.

We need to do far more to ensure that the enormous talents and experiences of the over-50's are not wasted as they are today

So we do need to encourage everyone to take a far more positive attitude to the contribution that over 50's can make to the workforce.

We need to do far more to ensure that the enormous talents and experiences of the over-50's are not wasted as they are today.

We are absolutely committed to the need to tackle this pension crisis. It is a long-term crisis affecting people way into the future and it needs long-term solutions.

We have introduced constructive solutions and we will continue to make the pensions crisis a top priority.