Tony Blair and Gordon Brown reportedly agree to restore earnings link to pensions

Brown and Blair strike deal on pensions

Brown and Blair strike deal on pensions

Gordon Brown and Tony Blair have reached a deal on pensions that would see the earnings link restored but the plans delayed by two or three years.

The chancellor has previously insisted that allowing the basic state pension to rise in line with earnings rather than inflation – which would see it increase by more than four per cent a year, as opposed to about two per cent – was unaffordable.

However, he has now agreed to the proposals put by Lord Turner’s pensions commission to restore the earnings link, on the condition that it is not introduced by 2010, as Lord Turner suggested, but by 2012 at the earliest.

Treasury officials say this delay would give the government time to make the savings necessary to pay for the change and ensure it was not introduced in the middle of the 2009-11 spending review.

The prime minister and the chancellor are also thought to have agreed that the state retirement age should increase to 68, another of Lord Turner’s key recommendations, which would help fund the more generous pension.

Speaking from Vienna, Mr Blair confirmed the agreement, saying: “This has taken an awful lot of work. It’s of course been difficult because these are very important issues.

“But if we’re able to resolve this to bring our country together, our political parties will be a huge bonus.”

The proposals will be discussed at a cabinet meeting next week, chaired by deputy prime minister John Prescott, and a pensions white paper is expected by the end of the month.

The link between earnings and pensions was scrapped by Margaret Thatcher’s Conservative government in 1981, and Mr Brown continued the practice of means-testing across the benefits system, in particular with the pensions credit.

This tops up the state pension depending on the level of an individual’s savings, and is currently claimed by about 40 per cent of pensioners.

However, critics warn it acts as a major disincentive for people to save for their retirement and Lord Turner said that unless something was done, three quarters of over 65s would be means-tested by 2050.

In his final report in April, he warned:”If the state pension system is not reformed in a way which limits the spread of means testing, the success of the proposed new system of private pension saving will be undermined.”

The agreement over pensions removes what has been a major bone of contention between Mr Blair and Mr Brown, and supporters of the chancellor insist it shows that they can work together to ensure a “stable and orderly transition” of power at No 10.

The Conservatives have welcomed the news, but said they would wait to see the final proposals to make a firm judgment.

Shadow chancellor George Osborne said he believed there were two main criteria for any new pensions system – would it give pensioners dignity in retirement, and was it affordable.

“I hope the essential elements of this deal, which is a more generous state pension, will go ahead,” he told BBC News 24.