Blair and Brown agree deal on pension rise

The basic state pension is set to be increased in line with earnings after 2012 under a compromise being thrashed out between Tony Blair and Gordon Brown.

A long-running dispute between the Prime Minister and Chancellor over the Government's pensions policy is close to being resolved after several tense meetings against a backdrop of speculation about when Mr Blair should stand down.

A commission chaired by Lord Turner of Ecchinswell, the former CBI director general, recommended last November that the state pension, which currently rises in line with prices, be linked to earnings, which increase faster, from 2010.

Mr Blair has dropped his previous insistence that the Government should bring in more generous rises from 2010. In turn, Mr Brown has softened his opposition to the proposal on the grounds that it was unaffordable and would mean putting up taxes. Delaying the move by two or three years, the Chancellor believes, would give the Government more time to find savings in other areas in order to avoid a tax rise.

The latest meeting yesterday ended without agreement and Whitehall sources said that several issues remain to be resolved before the Government publishes a White Paper on pensions later this month. But cabinet ministers believe that a compromise is in the air and should be agreed shortly.

Allies of Mr Blair claim Mr Brown has backed down significantly since launching a pre-emptive strike against the Turner report. At the time, the Treasury warned that the blueprint could put 5p on the basic rate of income tax. "Tony has won the argument; there has been a massive shift," said one Blair ally.

Brown supporters deny that the Chancellor has climbed down, saying that the expected compromise is a good sign that he can work together with Mr Blair in the transitional period before the Prime Minister leaves Downing Street. The Brown camp wants closer co-operation on policy - and agreement on a departure timetable - to be part of the "stable and orderly transition" promised by Mr Blair.

Pensions is probably the most difficult problem on the Government's agenda. Mr Blair and Mr Brown have rejected other possible solutions such as limiting the earnings-linked increases to the over-75s or phasing in the rises over several years. They have agreed that it would be simpler and fairer for the increase to cover all pensioners from one start date.