Are we about to see a major change in Tory pension policy? That is certainly on the cards following their recent summit with pension bosses. The key question posed at this gathering, I am told, centred on contracting-out. Were employers still committed to this policy?

It is important to remember the role contracting-out has played in the Tories’ pension strategy. The rebate sprung from their free market instinct to encourage private pension provision. Until very recently the Tories hailed this approach as if it had come down Mount Sinai.

The first signs of a change in policy by David Willetts, the Tory Work and Pensions Spokesman, followed the National Association of Pension Fund’s report on how the state retirement pension might be reshaped and raised substantially. Essentially, the NAPF signalled that the contracted-out rebate might be used to finance an immediate and substantial rise in the state pension.

When I first read the NAPF paper last year my immediate reaction was that the NAPF had signed its own death warrant. Without the current rebate going to support existing members, company schemes would collapse. Yet I appear to be wrong in that the NAPF stance reflects a change in opinion about the national insurance rebate that has resulted in the organisation’s current view.

That certainly is what is suggested from reports emanating from the pensions summit David Willetts recently called. Few employers running large company schemes spoke up in defence of the rebate.
On one count this is surprising. The rebate still stands at a sizeable slug of the entire national insurance contribution workers and employers pay into the scheme. So what is changing? I guess two forces are at work.

The first is that many employers are probably reviewing where, if anywhere, their current pension schemes are heading and what the value of the rebate is relative to the benefits they are offering. The second is that many employers are disengaging from the burden of administration that comes with this further complication.

Increased funded coverage is the name of the game for both major parties. The Government wishes to see the current 60-40 state to private funding ratio reversed. And the Tories not unnaturally have extolled the virtues of funded over pay-as-you-go provision. If the rebate is therefore up for grabs can a scheme of linked reforms come into play, which adds to rather than undermines still further funded pension coverage?

There is of course the Pensions Reform Group proposal knocking around in the public debate, which is currently being re-costed by the Government Actuary and which, as an interim proposal, only uses the national insurance rebate to finance the reform for all new members. The aim of the scheme when fully operative would be that the new funded provision, combined with the existing state pay-as-you-go national insurance scheme, would offer a pension above means-tested support levels.

David Willetts and I have had lively discussions about the scheme, which I could caricature as a belief that the scheme is a wheeze to nationalise the entire economy. The PRG proposes an independent guardianship of the scheme, along the lines of the Monetary Policy Committee, but David Willetts believes politicians will inevitably get their sticky fingers on the assets.

Even in this worst case scenario, the owners of these pension assets would presumably punish severely any Government for their trouble. But by siding with those favouring the abolition of the rebate, the Tories could open a Pandora’s Box. The danger is that the Government could capitalise on this debate, abolish the rebate, use only part of the sums to bolster the existing state pension, and use the substantial part of the revenue gained thereby to offset what will by next year be a growing fiscal crisis for Gordon Brown.

But the Government won’t have a clear run here. Even the non-betting public would probably put a 50-50 chance on a major pension scheme going belly up before the next election. No-one can sensibly prophesise how the ensuing panic would affect the Government’s chances of re-election.

But if they have on the statute book a scheme similar to the PRG’s, using the rebate for new workers so that there will be no increase in cost, then the Government might be able to protect itself from the storm. Long-term pension reform would have been enacted, the governance of the scheme would be there for everyone to judge, and the question of larger contributions could safely be left to parliament after the election.