State pensions in the firing line

THE State pension system could collapse under the weight of huge costs as millions flee crisis-hit company schemes, a group of experts will warn on Monday.

Unless Gordon Brown reverses his annual £5bn tax raid, which has stoked up the pension turmoil, those in private schemes will flock to the state 'second' pension, formerly Serps, according to the influential Item club of economic forecasters.

The Chancellor's 1997 stealth tax on pension funds could spark a crisis in the state system without prompt action, warns Professor Peter Spencer of Birkbeck College, London, in an Item report.

About 10m people are in the state second pension, rebranded this year as S2P. But company schemes and private plans are staggering under tax increases, plunging share prices and longer life expectancy.

Now some experts are suggesting that many more should seek shelter with the state. Nearly eight million people in company schemes would be better off switching to S2P. The second scheme was brought in during the Seventies as a state version of company plans. It should not be confused with the basic state pension, a modest sum paid to all.

Despite attempts by governments since the mid-Eighties to make the second pension less attractive, it is looking a better bet. Spencer warns: 'The second scheme is completely unfunded. The Government taxes today's workers to pay today's pensioners. People have been opting out for years to join private plans, but now the flow is the other way. This has the power to bring about the collapse of the entire state second pension.'

He says it would be 'politically unacceptable' for the Government to try to deter people from joining S2P by stepping up contributions and reducing benefits. The alternative is to restore the billions taken in tax from private funds by Brown since 1997.

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