The Government has notched up three firsts this week in its attempts to impose some kind of order on to its fast crumbling pension strategy. For the first time the Government has admitted publicly that it is in a massive hole, and its best approach is to stop digging. Second, figures released from the House of Commons library show that last year highest paid taxpayers scooped over half of all the taxpayers’ £13 billion annual support for pension savings. Third, other data released this week show that, at the next election, over eighty percent of those likely to vote will either be retired or within a twenty year striking distance of that event.

Both main parties are to blame for today’s shambles. Nigel Lawson’s tax grab on pension fund surpluses led to the running down of funds in the fat years of stock market boom. Surpluses have traditionally been used to tide funds through stock market falls. Anyone who believes that taking a further £5 billion a year from pension funds, as Gordon Brown does, will result in more generous pensions, rather than the reverse, is clearly not living on the same planet as ordinary people.

The most important breakthrough this week is the Prime Minister’s recognition that his Government has only half a pension strategy, and that the half in place – to help the poorest pensioners – will soon become unsupportable. What was also noticeable was the way the Prime Minister berated the evils of means-testing. This was, of course, the starting point for welfare reform in 1997. What has changed, thankfully, is that the Prime Minister now seems determined to overrule Chancellor’s strategy, which is largely built around an ever extending programme of means-tests – although Gordon Brown prefers to call them tax or pension credits.

Means-testing will always have a place in any welfare strategy. The danger is when it becomes the strategy. The Pension Credit when fully rolled-out will cover eighty-five percent of pensioners. This policy is unsustainable on two counts. It will cost an additional eleven pence on the standard rate of tax – surely the shortest suicide note ever penned for an election. Worse still, it sends out the message that it does not pay for most people to save, and they do not. Pension savings are nose-diving.

Any pension strategy has to have at least two parts, both of which are aimed at cutting through the means-test thicket Gordon Brown has nurtured. The Liberal Democrats have picked up on an idea which has support across the House of Commons by proposing to raise the basic state pension by £25 a week for single pensioners over the age of 75, and by over £30 for pensioner couples. Their costings are however flaky. They do not know how to pay for the increase over the longer-term. Here is where this week’s figures from the House of Commons library are so important.

For the first time ever, higher rate taxpayers scooped over half of the £13 billion plus tax subsidy to pension savings. To allow this subsidy at the standard rate only gives Mr Blair almost £2 billion to play with in putting a successful short-term strategy in place before the election.

These funds could be used to help the oldest pensioners. Alternatively, they would pay for a £6 a week increase for the single pensioner. Those claiming Pension Credit would not benefit from such a move, but they are already being helped. Such a strategy helps the poorest pensioners most as these are those individuals who are unwilling to claims means-tested assistance.

Increasing the state retirement pension is still only half a strategy. The Government must also give the electorate a clear idea of its longer-term reforms for its third term. Pensions are set to become a major contentious issue in the run-up to the next election. Other figures just released by the Commons’ Library show that, for this first time ever, over half of all those likely to turn out to vote will already be retired. Add in those within twenty years of this event and the total surges to over eighty percent.

Three months before I resigned from the Government, the Prime Minister turned his mind to pension reform and asked for my views. The ideas I submitted have since been worked up in detail by the Pensions Reform Group. The aim is to establish a Universal Protected Pension by merging the current National Insurance pay-as-you-go pension with a new funded scheme to guarantee a pension of twenty-five percent of average earnings.

It meets the Prime Minister’s demand for simplicity. The scheme is compulsory, with everybody a member. With everybody included there is no cost involved in trying to sell these pensions. It puts a sell by date to all major means-tested programmes as the Universal Protected Pension lifts pensioners free from low income.

It benefits the lowest paid most as they have never had such an offer before. But it squares the higher paid as only a few have enough money to buy a pension guarantee in the market. Only a community can make this offer universal.

The Government Actuary has already costed one variation of this scheme. By using the National Insurance contracted-out rebate to help fund the scheme, a pension of twenty-five percent of average earnings could be paid to each member at 72. The actuary is now engaged in costing a lower retirement age as well as the level of pensions older workers would get who could not make enough contributions for a full entitlement.

The Tories and Liberal Democrats now have pension plans to put before the electorate. It is urgent for the Government to do the same. Once Adair Turner’s Pension Commission reports next month, not having a long-term policy will be severely punished by voters. It is to this threat that Tony Blair has begun to respond over the past week.