By Frank Field MP Chairman of the UK Pensions Reform Group

The government will shortly unveil plans for pensions reform. BBC News Online has asked leading political figures for their opinions. In the third article, Frank Field MP, chairman of the Pensions Reform Group and former Minister for Welfare Reform explains how he would solve the pensions crisis.

Britain is living in a fool's paradise. And the country knows it.

Much more needs to be saved if people in retirement are to have incomes which allow the standard of living they expect to enjoy.

Poorer people know that the government is teaching them not to save

Frank Field MP

Yet people do not save for the very good reason that they know it is not worth it.

Richer people wonder how long the present boom will go on, and how big the bust might be which lurks around the corner.

Poorer people know that the government is teaching them not to save.

Means-tested help for pensioners is now so generous that possibly 40% of the working population cannot make themselves better off in retirement by going without today to ensure a better tomorrow.

Fragile confidence

It may only take the collapse of a German bank, let alone one of the major insurance companies in this country being instructed by the FSA [the City watchdog] not to take on new business, for the pack of cards marked 'confidence' to collapse.

Preventing much of the pension industry imploding must necessarily be an operation conducted in strict privacy

Such a collapse might even be brought about by a failure in the Japanese banking system.

Likewise if large companies in this country follow the Pru's decision to switch call-centre workers' jobs to India then it is possible that within a short space of time unemployment will be rising sharply in Britain.

It is not in the government's power to prevent any of these scenarios from developing.

It should, however, have a contingency plan in place.

A good motto is 'hope for the best but plan for the worst'.

In particular it must discuss with the FSA how rules can be changed legitimately so as to prevent any of the major insurance firms finding themselves on the ropes.

To change the rules once this has happened will merely add to the sense of panic.

It does not make any sense to put money away now when it does not make them better off later

Preventing much of the pension industry imploding must necessarily be an operation conducted in strict privacy.

Where the Government can and should be seen to act publicly is in trying to persuade people on middle to lower incomes to save more.

The reason so many do not currently do so is because, as I have said, it does not make any sense to put money away now when it does not make them better off later.

Compulsory pensions

Nor is it an option to make stakeholder pensions compulsory.

We already have compulsion in the system and, in addition, taxpayers compulsorily pay 5p on every pound of taxable income to foot a welfare bill for pensioners just to make good past failures to implement lasting reform.

Currently the government has two types of pension proposals before it.

The first, proposed by the National Association of Pension Funds and IPPR, is to significantly increase the basic state retirement pension and pay for this through national insurance contributions or taxes.

But no one with a sense of the recent past could guarantee that an increased tax load will be met in the future.

Making ownership of wealth the basis...is likely on past experience to be a better guarantor of payment than is one based on a tax contract

The other proposal before the Government is that from the Pensions Reform Group (PRG).

PRG proposes combining the State Retirement Pension with a funded scheme so as to pay a guaranteed pension between 25% and 30% of average earnings when the scheme matures.

Contributions would be compulsory and, to cover the contributions of the lowest paid, would also be redistributionary.

Phasing in extra contributions starting with 25 year olds would not affect the balance of the economy.

Making ownership of wealth the basis on which pensions would be paid in the future is likely, on past experience, to be a better guarantor of payment than one based on a tax contract.