Pensions rise as Blair and Brown close to making deal

Published on Friday 12 May 2006 13:46

OAPs are in line for bumper pension rises after Tony Blair and Gordon Brown agreed a deal to link their weekly payments to earnings rather than prices.

But it looks like the change will not come in until at least 2012 - two years after the date recommended by the Turner Commission.

The issue has been a major problem between the Prime Minister and the Chancellor but now they appear to have come to an agreement which would meet the concerns of the Treasury over the cost and would avoid major tax rises.

It was seen at Westminster as the first sign that the Government's top two have started to talk constructively in the wake of last Friday's disastrous local government election results in England for Labour.

Today's revelation that a deal on pensions is in the offing is seen by MPs as the first sign of a serious accommodation and change of heart by the two men.

Last year the report by Lord Turner - a former head of the CBI, the bosses union - recommended more generous state pensions linked to raising the state pension age from 65 to 68 by 2050 to cope with the growing costs of a population that is living longer, staying fitter and expecting more.

It recommended that the Government restore from 2010 the link between the basic state pension and average wages and not price inflation, as pensioners and many Labour figures led by late Cabinet Minister Baroness Barbara Castle and former trade union boss Jack Jones had campaigned on.

Margaret Thatcher broke the link with earnings and replaced it with the Retail Price Index in 1980, to Labour outrage.

But since the Government took power in 1997 it has refused to restore it.

Lord Turner argued that restoring the link with average earnings could be paid for partly by delaying the start of retirement from 65 to 68 as well as using money saved from the increase in women's pension age from 60 to bring it into line with men's between 2010 and 2020.

Mr Brown has favoured since 1997 the use of pension tax credits to help the worst-off pensioners out of poverty.

But with major problems over take-up, senior figures including former Cabinet minister Stephen Byers and Alan Milburn had argued for a return to the prices link.

Mr Blair has been persuaded of this argument and received the support of Pension Secretary John Hutton.

But now Treasury sources and those in Mr Hutton's department believe a deal is close.

The Treasury is understood to be happy provided the link does not return before 2012 to avoid major tax rises to finance it.

Mr Blair and Mr Hutton are ready to accept the delay to get what they want.

Downing Street was refusing to comment on the details of the talks.

But former Pensions Minister Frank Field said: "This is a deal to get us through the next week. Pensions reform needs to last for decades, for the next century. It won't last.

"This proposal merely holds the numbers for a while."

• Meanwhile the Tories have warned that Britain is becoming a "credit card" nation where spiralling personal debt is threatening millions of families with financial hardship or bankruptcy.

And they warned that the debt mountain could end up damaging the economy.

Shadow Chancellor George Osborne warned that while the increased availability of credit had many advantages it could cause financial misery.