Brown retreats on means-testing for poorest pensioners

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Gordon Brown has made a tactical retreat over pensions in an attempt to forge a cabinet and all-party consensus on sweeping long-term changes to the system.

In a surprise move, the Chancellor declared that the three-year inquiry chaired by Lord Turner of Ecchinswell would provide "90 to 95 per cent" of the basis for a pensions revolution that would last a generation.

His comments should pave the way for a White Paper next month based on the Turner commission's blueprint. In a trade-off, the state pension age would rise from 65 to 68 by 2050 but would be increased from 2010 in line with earnings rather than prices, which rise more slowly. The means-tested top-ups for the poorest pensioners championed by Mr Brown would be scaled back.

Mr Brown's warm response to the Turner commission's final report published yesterday was in marked contrast to the pre-emptive strike against its main recommendations last November. Then the Treasury dismissed the package as unaffordable, warning it could cost the equivalent of 5p on income tax.

Amid speculation that Tony Blair planned to overrule the Chancellor, Mr Brown struck a conciliatory tone last night in which he denied a split.

He said the pension credit scheme was a necessity but conceded that it had "limitations", adding: "I want less means-testing - I've always wanted less."

Mr Brown insisted there was "no issue of principle about the [basic state] pension being linked to earnings" and suggested that it would rise faster than inflation. "I think we're actually 90 to 95 per cent there on Lord Turner. I believe that we are moving towards a consensus that will not just last for one parliament but potentially for a generation."

However, the Chancellor entered one important caveat - saying he had always wanted to avoid tax rises to fund the £8bn-a-year extra cost of the Turner plan. "The issue which is still to be resolved on affordability is one on which Tony Blair and I are absolutely at one, and we know the country looks to us to manage the public finances in a prudent way."

His remarks suggest that he still regards an automatic link between the basic state pension and earnings as unaffordable - and may try to convince Mr Blair opf his case before the White Paper is published. If he fails to kill off the plan at this stage, he may yet seek to strangle it when he takes over as Prime Minister.

Another reason why Mr Brown talked up compromise was to head off damaging reports about tension between him and Mr Blair over when the Prime Minister should stand down. They will try to put on a show of unity today when they launch Labour's campaign for next month's local elections. Mr Brown said he had not asked Mr Blair for a departure date and dismissed media reports as " a bit like a soap opera".

The Government will reject Lord Turner's proposal to base women's pension rights on how long they have lived in the UK. Instead, women would qualify for a pension after a reduced period of paying national insurance.

Although welcoming news of a potential compromise, Lord Turner warned the Government that any attempt to cherry-pick from his proposals, without moving to significantly reduce means-testing, would fail.

He said that if the current state system was not redesigned, the proportion of people on means-tested pension benefits would rise from 40 to 75 per cent by 2050, ensuring that most of the population would have no incentive to make any additional saving. In this instance, he said, his idea of creating a National Pension Savings Scheme (NPSS), into which all employees would be enrolled, would not work. "Not only will the number of people subject to means-testing rise [if the current system is not reformed], but people will be subject to means-testing over a much wider band of their income," he said. "The danger of then enrolling people into an NPSS is that people will see that they are having their savings means-tested away from them."