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Blair and Brown hammer out pensions deal

Written by: Staff

LONDON, May 12 (Reuters) The link between Britain's basic state pension and average earnings is set to be restored as Prime Minister Tony Blair and Finance Minister Gordon Brown agreed a deal after weeks of haggling, officials said today.

Blair's office declined, however, to confirm newspaper reports which said the link would not be introduced before 2012 and would be paid for in part by raising the state pension age to 68 by 2050.

An overhaul of the overburdened pensions system is a key reform for Blair but Brown was worried about the hefty cost of the plan to restore the earnings link 25 years after it was broken.

Restoring the link with earnings was a key recommendation of a Pensions Commission report last year, chaired by Adair Turner, but the cost of the proposal caused a rift between the two political rivals.

''We believe we have reached agreement on pensions and it is based on the Turner blueprint,'' said a spokeswoman for Blair's office. ''It looks as if it will be linked to earnings.'' The Commission inquiry said pensions should be in line with earnings, rather than prices which tend not to rise as fast. The link was broken in 1981 by a Conservative government.

Restoring the link to earnings makes it less likely that pensioners will need means-tested benefits in old age, and hence remove a major disincentive to accumulate long-term savings, the Pensions Commission had said.

The government is expected to publish wide-ranging pensions proposals on May 22.

POLITICAL TENSION The deal comes amid high tension between Blair and Brown, the prime minister's most likely successor.

Blair has said he will not stand for a fourth term at the next election, due by mid-2010, and some in his Labour party are calling for him to stand down sooner rather than later and hand over to Brown.

Pensions has been one of the main areas of policy disagreement between the two.

If nothing is done to tackle an estimated 57 billion pound (100 billion dollars) pensions shortfall, a growing number of Britain's ageing population could find themselves dependent on means-tested state handouts when they retire.

In its 2005 report, the Pensions Commission said that restoring the earnings link from 2010 would add an annual cost of just over 1.0 per cent of GDP by 2020, equal to about 1.5 billion pounds a year in current earnings terms.

The Association of British Insurers (ABI) said it was awaiting the government's proposals but welcomed the restored earnings link.

''Our view is that ideally, the link with earnings on the basic state pension should be restored,'' said an ABI spokesman.

''This is broadly in the right direction -- a national pension scheme can only achieve its aims if there is radical reform of the state pension system.'' Reuters PR RN1529

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