As originally conceived, the state pension system was relatively simple. Entitlement to the state pension was built up through the national insurance contribution record of the individual. Whilst this tended to play against women whose NI records would typically be smaller or incomplete or even non-existent, it was, at least, reasonably comprehensible. The policy aim was to provide a typical “replacement rate” of 25 per cent of national average earnings at retirement for a single pensioner. All with the relevant record were entitled to this pension, irrespective of other income, and this remains the case today.

This ambition was modest enough, but it was envisaged that occupational pension scheme provision at work would top this up.

And, to a large extent, as we have already seen, this is what has happened – for the generation that has just gone into retirement at least, but with quite large cohorts being exceptions to the rule.

However, the single basic state pension with a full NI record is now just £95.25 a week, providing a replacement rate of just over 15 per cent – not 25 per cent. The abandonment of the rate of increase being linked to earnings, replaced with an inflation link, in the early 1980s, is largely to blame. This link will likely be restored after 2012 – but if it is not, the replacement value is projected to fall to 8.6 per cent by 2035. To top up pensioner incomes, a truly bewildering range of benefits, most means tested, some not, has been introduced in a piecemeal fashion over the years, alongside potential pensioner access to benefits not exclusively designed for them.

Principal amongst these is the system of pension credit. This means-tested benefit tops up the basic state pension to £130 for a single pensioner or £198.45 for a couple.

We can then add in to the mix savings credit, winter fuel allowance, free television licence, age related personal tax allowances, housing benefit, council tax benefit, disability allowances – the list is seemingly endless.

Pension credit is arguably the principal auteur in this drama. Whilst it has arguably lifted many hundreds of thousands of pensioners out of poverty since its introduction, it interacts adversely with modest private saving, and especially modest pension saving. Research by the Pensions Policy Institute in 2007 looking at this interaction, in the light of the introduction of auto-enrolment into pension saving from 2012, suggested that up to 40 per cent of the target market – modest to average earners – could gain very little advantage from, or be worse off from, private pension saving.

This is a situation which will be made worse from 2012 onwards, but is happening to smaller pension savers right now.

In a nutshell, from an extremely complex scenario, some savers will be putting money into a pension simply to deny themselves the pension credit income to which they would otherwise have been entitled under the current system. A paper from the Department for Work and Pensions seeking to demonstrate that most people will be better off from pension saving relies heavily on the value of the employer contributions envisaged from 2012, contributions which are at least arguably the employee’s own money in any case, as deferred pay.

To make matters worse, as a means tested benefit, it must be proactively claimed by the pensioner. DWP’s own estimates suggest that at least 33 per cent, or one-third, of those eligible to claim it are not doing so.

The interdependent savings credit means that those with non-pension savings of up to £6,000 will still be eligible to claim pension credit. Quite apart from the modest level of this credit, those with savings over this level will find their pension credit payments reduced quite sharply owing to the high assumed interest rates obtainable on those extra savings.

The founding fathers of the UK welfare state saw the state pension as an entitlement built up through a lifetime’s national insurance contributions, designed to provide a modest, but decent, retirement income upon which private saving could be encouraged. We think that principle should hold true today.