Bill to link pension and earnings

The funding of people's retirement is set for major reform

The government is expected to set out to restore the link between the state pension and earnings, in a bill to be outlined in next week's Queen's Speech.

The bill is expected to commit the government to announcing at the beginning of the next Parliament when the link will be restored.

It is also expected to say that at least 70% of women retiring will receive the full state pension by 2010.

Rises in the basic state pension have been linked to inflation since 1980.

The link to earnings could be brought back by 2012 if the government can afford it then and if not, by the end of the next Parliament.

The date for this to happen could therefore remain uncertain during the next general election campaign.

The bill is also expected to say that by the end of the decade, the percentage of women able to claim the full state pension on retirement will have risen from the current level of about one-third to 70%.

Issues unresolved

Plans for personal pension accounts are likely to be outlined in a White Paper in December.

Under the plans for personal pension accounts, every employee in the country would be automatically enrolled in the scheme unless they opted out.

It is understood employees would contribute 4% of their salary, employers 3% and the government 1% through tax relief.

However, the proposed employer contributions into the personal accounts are below the level of many existing workplace pension schemes.

The extent to which people would be able to choose pension providers and the involvement of the private sector in operating the scheme have not been resolved.

Personal accounts were first proposed by Lord Turner in a series of reports into the UK pensions system.

His three-year investigation was followed by a government White Paper in May.

It said the basic state pension would be linked to average earnings, rather than inflation, probably from 2012 "subject to affordability and the fiscal position".