Brown's policies are robbing us

The question of how to pay for the pensions of an ageing population is now the biggest single domestic problem facing every government in the developed world. Until recently, Britain was facing the challenge comparatively well. We accumulated more funds to pay for future pensions than all the rest of the EU put together.

But now that strong position is under threat. Every week another company announces that it is closing its existing pension scheme, usually replacing it with a less generous one. As a result young people's hopes of receiving an adequate private pension are becoming as faint as their faith in state pensions.

Why this sudden crisis in private pensions? The answer is partly that where companies promised to pay a pension equal to a defined proportion of employee's earnings the cost has risen with increasing life expectancy, just as the fall in the stock market two years in a row has eroded their surpluses.

The last straw for many companies has been the new accounting standard which will force British firms to show short-term movements in the value of their pension funds in their profit-and-loss account. That is not the Government's fault. However, ministers should have persuaded the accountants to put it off since a more sensible international accounting standard comes into force in a few years time. The Government has made this situation far worse by adding to the burden of red tape: one chief executive recently told me he spends a third of his time dealing with the company pension fund instead of boosting the company's output.

Most damaging of all, Gordon Brown delivered a body blow to our pension funds when he imposed his biggest ever stealth tax - a £5 billion a year tax on dividends payable largely to pension funds. When he slipped in that tax in his first Budget I labelled it the "Robert Maxwell Memorial Tax" after the only other person who thought he could get away with siphoning off money from people's pension funds without anyone noticing! While the stock market was booming it looked as if no one would realise what Gordon Brown had done until they retired and found their pensions were smaller than they hoped. But since the fall in the stock market the 20 per cent cut in dividend income, which this tax represents, is having a serious impact.

This attack on pension funds was particularly cynical because Labour had, to its credit, abandoned its former opposition to private pension funds and set a target of increasing their share of total pensions to 60 per cent by the middle of the century.

That is eminently achievable as well as desirable. Indeed I published a plan, called Basic Pension Plus, which over a similar time span would have ensured that 100 per cent of our pensions were backed by investments. This would have come about gradually by giving every young person starting work a personal pension fund into which would be invested rebates from their national insurance contributions sufficient to generate a pension at least equal to their state basic and earnings-related pensions.

Had the Government implemented that plan several billion pounds would have already accumulated in these funds. At very least the Government should have made the Second State Pension (which replaces Serps) fully funded and backed by investments. They originally intended to do this. But when Frank Field - who had been appointed to think the unthinkable - took his remit literally he got sacked and the idea was dropped.

If everyone did automatically own a personal pension fund they could decide when to retire - once their fund is sufficient to provide an adequate pension. The experience of self-employed people who do already have personal pension funds suggests that many would choose to work longer, save more and get a better pension.

Because government has not made such funds universal the only way they can meet their pension target, as people live longer, will be to increase the age at which people can draw their state pension.

On average, people reaching 65 have a life expectancy one month longer than the people who retired the year before. So just to stop the pension burden increasing the Government will need to raise the pension age by one month every year. Many would advocate a once for all increase in the state pension age to make up for the increase in longevity that has already occurred.

If we save we can choose when to retire. If we rely on the next generation of taxpayers to pay our pension they will certainly want us to work a lot longer than we do now. Labour has messed about with our pensions quite enough. Let us hope it is not too late to get things back on track.

? Peter Lilley was Secretary of State for Social Security from 1992 to 1997