LONDON (Reuters) — Britain’s government yesterday detailed its proposals to avert a pension timebomb by setting up a national saving system that will cover up to 10 million citizens.A key reform element of the most radical shakeup to British pensions in 60 years, a low-cost National Pensions Saving Scheme (NPSS) will be set up by 2012, taking compulsory contributions from companies and staff and routing money to investment funds.

The rising costs of an ageing population have prompted many firms to close pensions. Britain has an estimated $57 billion pound ($111.8 billion) saving gap and pensions have shot up the political agenda in Britain and in other nations.

“These reforms are designed to fill a gap in the existing market — we want them to complement the existing market, not compete with it,” John Hutton, Secretary of State for Work and Pensions (DWP), said.

Many commentators fear that a new system of what are called “Personal Accounts” could undermine existing pensions and encourage employers to “level down” current relatively generous contributions to the minimum levels set by the NPSS.

“Personal accounts are being sold as the “big idea” to radically transform pension saving in the UK and we want them to succeed. But if Pension Accounts are to be effective the concerns of business will need to be addressed,” Graeme Leach, chief economist, Institute of Directors, said.

The new system will add to company costs and could cut future pay rises, Martin Temple, director general of manufacturing organisation EEF, said in a statement.

“By ignoring the need for some form of initial financial assistance for smaller companies, the Government runs the risk of failing to gain their active support for Personal Accounts.”

The government chose the model of a simple, single organisation to run Personal Accounts instead of competing private sector providers, as suggested by Britain’s insurance industry, because it said this would curb costs.

Exact details of how money will be invested and other points about how new saving accounts would be run were left to be fleshed out for a later date.

Britain’s insurance industry said it was doubtful the new system could be run as cheaply as the government hoped.

“We remain concerned that the government is unrealistic on costs and charges, particularly if it wishes the private sector to offer specialised funds, such as for ethical investment,” Stephen Haddrill, director general, Association of British Insurers, said.

People will not be allowed to transfer money into or out of the new system from existing pension funds because this would undermine efforts to raise overall savings levels, the White Paper document said.

The government said it was still consulting on how long workers should be in employment before joining the scheme but said there was “strong evidence” against a waiting period, as it would disproportionately affect temporary workers and undermine the goal of making pensions portable between jobs.