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Last Updated: Friday, 12 May 2006, 16:23 GMT 17:23 UK
Brown and Blair in pensions deal
A woman protesting over pensions
Pensioners have campaigned for the earnings link to be reinstated
A deal on pensions has been agreed between Tony Blair and Gordon Brown following months of wrangling, the prime minister has confirmed.

Under the agreement, the link between the state pension and earnings will be restored - probably in 2012.

There is understood to be a deal on raising the state pension age to 68 by 2050. More details are being discussed.

The Lib Dems welcomed the deal as a "step forward", but warned it would not spell the end of means-testing.

The changes will not happen until at least 2012 - two years after the date recommended by Lord Turner's commission on pensions.

And firms employing fewer than five people will not have to pay into a proposed new national pension savings scheme, the BBC understands.

The details of the deal struck in government over pensions seem broadly similar to the recommendations made by the Pensions Commission late last year

Medium-sized businesses will pay half of any rate, and although there will be no discount for large companies, the changes will be phased in over three years.

Much of the new deal will be paid for by equalising the retirement age for women with men, but womens' entitlement to a pension will be based on about 30 years of contributions rather than the current 39, the BBC has been told.

'Significant achievement'

But the deal is understood to mean that large tax rises in this Parliament will be avoided.

Speaking in Vienna, where he is attending a summit of Latin American, Caribbean and EU countries, Mr Blair said he would not go into details, but was confident there was broad agreement on the issue in government.

"And that is a significant achievement by any standards," he added.

The prime minister's official spokesman earlier insisted the deal was "affordable" - an issue thought to have been a key sticking point in the negotiations.

He refused to say whether it would lead to tax increases, saying that was a matter for the chancellor.

'In-fighting'

But former Welfare Minister Frank Field said that, although the pensions agreement was being presented as a deal between the premier and the chancellor, it was in fact "game, set and match" to Mr Brown.

He predicted the agreement would "not last" and it had only been announced to distract attention from government "in-fighting".

Conservative shadow pensions secretary Philip Hammond said he was glad a deal had been reached, but said it had been delayed by disagreements between Number 10 and the Treasury.

"It gets back on the rails a process that should have been going on since the Pension Commission report last December, which has been derailed by this internal spat," he told the BBC.

"Now hopefully we can get on with the serious business of looking at the detailed proposals the government will put forward, and trying to build a cross-party consensus."

Liberal Democrat pensions spokesman David Laws said the deal was a "significant step forward" but "like all compromises and fudges, you run the risk of a product that is half-baked".

He added: "The price of trying to buy off Gordon Brown has been to end up with a system which is going to have many holes through which people can fall out of a decent pension.

"And to keep many pensioners on means-testing without the incentive to save."

Ageing population

Lord Turner's report, published last year, recommended raising the state pension age from 65 to 68 by 2050 to alleviate the growing cost burden associated with a population that is living longer.

The state pension will still be there but I think in terms of people's overall income in retirement, it is going to diminish in significance
Tom McPhail
Pensions expert

It also called for the state pension to be more generous, with increases linked from 2010 to average wages and not price inflation - an issue that pensioner groups have long campaigned for.

Lord Turner argued that restoring the link with average earnings could be paid for by delaying the start of retirement, as well as by using the money saved as women's pension age comes into line with men's between 2010 and 2020.

Campaigners say pensioners have missed out on wage increases enjoyed by the rest of the population since the pensions-earnings link was broken in 1980 by Margaret Thatcher's government.




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