David Lloyd George may have led Britain to victory in the First World War but he also achieved another, arguably more important, legacy. In 1908, exactly 100 years ago this week, the Welsh-speaking Liberal politician established the British state pension. Against considerable opposition from the House of Lords, Lloyd George introduced a non-contributory but means-tested pension of between two and five shillings a week (the equivalent of about £8.60 and £21.50 today).

Fast-forward 100 years and pension provision is about to undergo another giant reform but this time with considerably less opposition from the Lords. Under the Pensions Bill, currently working its way through Parliament, every full-time employee without an existing private pension will be enrolled automatically into a Personal Account from 2012. This good idea, in theory, is increasingly looking like a bad idea, in practice - at least for millions of low-paid and older workers.

The problem is that means-tested benefits mean that many people will not gain from saving into a Personal Account. Currently the difference between the basic state pension of £90.70 a week and the (means-tested) weekly income guarantee for pensioners of £124.05 is £1,731 a year. To generate an income of that size would require a pension pot of about £30,000. It will be difficult for many workers to save this much, meaning that they will ultimately receive the same income in retirement as someone who has not saved a penny. In effect, their contributions will have been a complete waste of money.

The auto-enrolment element of Personal Accounts means that the Government is effectively encouraging the lowest-paid into a system that could make them worse off. If the private sector did this it would be a huge mis-selling scandal. In addition, the fear of losing out will mean that many people who could benefit will be deterred from signing up.

If ministers want to solve this problem they need to follow Lloyd George's lead of 100 years ago and think radically.

Less stick, more carrot and we will all save more for retirement

So if Lloyd George were alive today, what radical solutions would he suggest? Well, given that he was brought up in the more frugal Victorian era, he would probably think that all benefits should be means-tested and the generosity of the welfare state scaled back.

Perversely, however, the best solution might actually be to phase out means-testing altogether. This could be done either through the very popular but expensive route of increasing the basic state pension or the much less popular but cheaper - and, ultimately, more likely - route of gradually reducing the real value of the weekly-income guarantee.

Indeed, what many critics of Personal Accounts fail to acknowledge is that demographic changes will put such a strain on the public finances of future governments that there will be massive pressure to cut state pension provision. This means that there is practical, as well as philosophical, merit in individuals relying on themselves and not the State to provide for their old age, irrespective of how irrational saving might now appear.

Nonetheless, many low-paid and older workers will feel understandable caution about sacrificing some income now to insure against future governments becoming less generous, particularly when their incomes are being pressed in many other areas. Sadly, Gordon Brown's near-obsession with tax and pension credits also means that nobody should expect means testing to disappear anytime soon.

Perhaps, then, a better solution would be to exempt an amount of pension savings - say up to the first £30,000 - from means-testing for the pension credit.

This would be cheaper than increasing the basic state pension and would mean everyone, even the poorest and oldest workers, would have an incentive to save for retirement.