Pensions: Yes, we do have to rely on the state for a better pension

Pensions: Yes, we do have to rely on the state for a better pension

David Blunkett already has plenty to keep him busy in sorting out Britain's pensions mess, but this week he had another hot potato thrown into the mix.

The new work and pensions secretary has been banging on about the need for people to take more responsibility for financing their retirement, and how they can no longer rely on the state to dig them out of poverty.

So he will have been less than delighted to hear that Britain's biggest insurer, Norwich Union, thinks the vast majority of people "contracted out" of the state second pension (the successor to Serps) - whatever age they are - should go back in. Which is why it is planning to shift 40,000 of its pension policyholders back into the top-up state pension.

The decision follows similar moves by some other insurers, and reflects growing concern that many people could be worse-off in retirement as a result of opting out of Serps and taking up the offer of government payments into their own private pensions instead.

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Many would say that this, and previous, governments have only themselves to blame for this latest pensions muddle because they haven't made it financially worthwhile for people to stay out of the state scheme.

The problems stem from the Conservative government's attempts from the late 1980s to persuade people to contract out of Serps, the state earnings-related pension scheme, and set up their own pension plan.

If you contract out through a personal pension, as millions have done, the government rebates some of your national insurance contributions into your pension plan.

The idea is that these are invested and should grow to more than the value of the state provision you've given up. But a combination of factors, including stock market falls and a slump in annuity rates, have blown a big hole in that theory. A study by Which? (formerly the Consumers' Association) found that some contracted-out personal pension holders could end up with less than half what they would have got if they stayed in Serps.

Some experts say the problem is, simply, the rebates for contracting out aren't worth as much as the state pension people are being asked to give up. And that a Serps pension might not be sexy, and it might not make you rich, but it's "guaranteed".

It's a complex issue, and many would say that the advice as to what you should do will depend on things like your age, how much you earn and your attitude to risk.

Perhaps, not surprisingly, many people have simply done nothing.

One or two companies, including Co-operative Insurance Society (CIS), HSBC and now Norwich Union, have taken decisive action.

Most of the 40,000 contracted-out people, bought their pension policy direct from a Norwich Union adviser. They will automatically be switched back into the state second pension, unless they tell the company they wish to remain contracted out. Norwich Union will begin writing to customers over the summer.

However, the company has another 180,000 contracted-out policyholders who bought their pensions from independent financial advisers, and they will not be automatically contracted back in.

That's despite the fact that Norwich Union firmly believes changes in the economic environment have eroded the potential benefits of contracting out, and "the vast majority" of policyholders - no matter what their age - should rejoin the state second pension.

So why isn't the company putting these people back in? A spokeswoman says it believes they should be urgently seeking advice from their IFA as to what they should do. So, if you took out a Norwich Union pension through an IFA, and you're contracted-out, make sure you speak to him or her, because Norwich Union and many other experts think most people should be in rather than out.

There is a chance the government may bow to pressure and increase the rebates for people who contract out - which would change everything. A consultation document is expected to be issued by ministers in August. But even if this does propose changes, these wouldn't come in until spring 2007.

r.jones@guardian.co.uk

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