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Restoring earnings’ link paves way for NPSS

Significant compromise’ by Treasury lifts the biggest barrier to Turner’s pension reforms

The Prime Minister and the Chancellor have agreed to restore the earnings’ link to the basic state pension in a move which opens the way for a national pension savings scheme.

The basic state pension is set to rise in line with earnings from 2012, later than Lord Turner recommended in his report, in a move that is being seen as a significant compromise by the Treasury.

The deal lifts the biggest barrier to major pension reform after months of argument between Number 10 and the Treasury. However, next week’s White Paper is expec-ted to include room for Brown to manoeuvre by using his caveat on affordability.

It also paves the way for the rest of Turner’s reforms, including his proposed national pension savings scheme and a rise in the state retirement age.

Measures to placate the business community are thought to include full subsidy of NPSS employer contribution costs for the first five years for firms with fewer than five staff and concessions, paid for by the tax-payer, for those with fewer than 50 employees.

Funding for the restoration of the earnings link will come from abolishing the option to contract out, except for final-salary schemes, and some of the savings made in the equalisation of women’s pension age.

The link between the basic state pension and earnings was broken by the Conservatives in 1981 and it has taken strong political pressure and concessions around the timing of the restoration to shift Brown’s position.

The LibDems have declared the deal “half-baked” as they claim it will only halt rather than reverse means-testing.

Conservative Shadow Work and Pensions Secretary Philip Hammond says the move to use the contracted-out rebate to fund the plan is flawed as it creates short-term gain while taking on long-term liabilities.

Former welfare minister Frank Field says: “This deal has everything to do with getting the Government through the next seven days and little to do with securing a lasting pension settlement for the next seven decades.”

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