According to financial analysts, many employees could be worse off in retirement, writes Rachel Donnelly, in London.

Even the mere mention of the p-word these days is enough to send confused savers into a spin.

More and more employers are closing final salary pension schemes - payment is linked to final salary and number of years worked - and moving employees into money purchase schemes because of new accounting standards and a Labour policy abolishing tax relief on dividends.

Financial analysts estimate this has caused a £5 billion sterling (€8.2 billion) "black hole" in pension provisions every year since they came to power in 1997. As a result many employees could be worse off in retirement, increasing dependence on the state.

On top of that, last week's warning from insurers that thousands of people with private pensions would be better off switching back into the state system means retirement looks distinctly less comfortable.

This latest news was another blow for Labour's pensions strategy, undermining ministers' aims of encouraging more people to save in the private sector for their retirement and reduce reliance on the state.

The headline writers' preoccupation with pensions really took off last week when the big private pension providers, Legal and General, Equitable Life and Prudential began sending out 100,000 letters recommending that men aged 54 and over and women aged 49 and over transfer back into the state second pension scheme.

Otherwise known as Serps - State Earnings Related Pension Scheme - it's a kind of top-up on the basic state pension and these savers had previously opted out because National Insurance rebates paid to their pension company provided more income than if they had stayed in. But with falling stock market returns over the past two years and National Insurance rebates reducing over time the incentive for staying out of Serps for this group - and even for twentysomethings some analysts argued - greatly diminished.

If the advice is heeded - and the insurers only gave a few weeks' notice before the end of the financial year - up to three million people over the next five years could decide to opt back into state provision. But Labour has fiercely denied this, with Work and Pensions Secretary, Mr Alistair Darling, insisting that "it has always been the case" that people opt in and out of the second pension scheme.

On the plus side, some analysts predict the more people that return to Serps, or the State Second Pension as it will be known after April, the more money the Treasury saves because it is not required to pay incentives to savers to take out private schemes.

But others accuse Labour of relying on shock tactics to deliver pensions strategy, cutting back on incentives to take out private schemes and of failing to acknowledge that people can now expect to work longer and retire later than their parents did to afford to retire.

"The UK government in all its guises has a history of reneging on its promises and has made no secret of its desire to reduce the retiring population's dependence on state pensions," declared Mr Ian Lowes, technical director of independent financial adviser Lowes Financial Management last week.

"If a pension provider had behaved in the way the government has, there would have been a public inquiry by now and no doubt the executives of the company would be serving time."

Writing in the Parliamentary publication, The House magazine, shadow secretary for work and pensions, Mr David Willetts, highlighted some of the shortcomings in Labour's plans to boost the level of pension spending coming from the private sector.

In tune with post-war financial history savers were generally better off with private schemes because British companies had a good record of providing high quality policies. But it was extremely "disappointing", Mr Willetts said, "that we now seem to be travelling in the opposite direction" to the government's long-term target of a 60/40 split between private and state pension provision.

"The most recent Family Resources Survey shows a year-on-year reduction in the proportion of employees with an occupational or personal pension and this fall is recorded in every single age group," Mr Willetts continued. "Similarly, the Pensioners' Income Series shows a fall in the number of pensioners with income from an occupational pension scheme."

There are other issues around pensions that continue to contribute to a sense that all is not well at Mr Darling's department. The take-up of the government's stakeholder pension, aimed at people on poor and middle incomes, is low with signs that company directors are buying them for their wives and grandparents are buying them as gifts for their grandchildren.

In addition, the proportion of pensioners on means-tested benefit is set to rise to 57 per cent by 2003. But many pensioners fail to take up the benefit because the procedure is so complicated and the poorest in society often lose out on vital income.

Even with a review of pension policy underway and with Labour urging people to save more for retirement, the government is in danger of missing its target of reducing reliance on the state.