PM backs pensions report in new split with Brown

Tony Blair last night defended the Turner report on boosting the value of the state pension as "very exciting", in spite of previous criticism of the proposals by the Chancellor, who argued they were unaffordable.

The Prime Minister gave the clearest signal so far that he will fight to stop the Chancellor quietly shelving the Turner recommendations for restoring the link between the state pension and earnings. Mr Brown, who prefers targeted increases for pensioners through means testing, has all but rejected the findings. Treasury sources claimed that they would add 5p on income tax.

However, Mr Blair denied on Sky News the proposals by Lord Turner were dead. "Absolutely not," said the Prime Minister. "They are very exciting proposals. They offer us the possibility of a long-term solution to the problems we have in Britain on pensions... All the Treasury is saying is you have got to make sure that they are affordable."

Lord Turner also hit back at the Treasury's claims that the recommendations could add 5p in the pound on income tax, dismissing as a "caricature" Treasury estimates that it would cost £14bn rather than his estimate of £2bn. He said the higher figure could come true only if the Government slashed the value of the poorest pensioners' future incomes by breaking the link between means-tested benefits and earnings.

"It comes to £14bn only in a scenario that nobody believes is going to happen. And if it did happen you would have Help the Aged and all the poverty groups screaming blue murder," Lord Turner said in an interview in the London Evening Standard.

The dispute between Mr Blair and Mr Brown over the Turner report goes to the heart of a long-running battle between Downing Street and the Treasury over the Chancellor's support for means-tested tax credits, rather than more general increases in benefits. Mr Blair has the backing of pensioners' groups who complain that means testing for additions such as pensioner credit has meant many pensioners have failed to apply for benefits due to them.

Lord Turner clearly took Downing Street's side saying that the spread of means-tested benefits was reaching the point where millions would not see any benefit from saving because the state would take care of their bills, while penalising those who had saved.

Clare Short, the former International Development Secretary, said the row over the Turner Report was making the Government "look foolish". She urged the Chancellor to challenge the Prime Minister as soon as possible, warning that Mr Brown risked being damaged by further delay.

"I think there's a problem for Gordon, that the longer it takes, the more he has to defend all the things that are upsetting everybody and then how can he be fresh? That's Gordon's problem," she said in an interview for the GMTV Sunday Programme.

"Will that [change of leadership] bring some freshness and a sense of a new beginning, or will everything have fallen into disrepute by then and he can't pull it back - that's the question."

Council workers' unions last night threatened industrial action and a legal challenge to the Government after John Prescott's Office of the Deputy Prime Minister confirmed that it is scrapping the so-called 85-year rule for retirement on a full pension.

Under the rule, staff who are 60 years of age with 25 years service can retire with a full pension, but council leaders have warned that they are facing a £27bn black hole in their pension funds and they cannot afford it to continue.