The link between earnings and pensions is to be restored in the UK after a compromise was agreed between prime minister Tony Blair and chancellor Gordon Brown.

Currently pension payments increase in line with prices, but the Pensions Commission chaired by former CBI director Lord Turner of Ecchinswell last November recommended that the link should be with earnings, which rise faster. However, Mr Brown did not want to be forced into raising taxes in order to pay for the reforms.

In a compromise, the earnings link will be restored but the pension age will rise to 68 by 2050 to finance the increase. The cost will be further eased by delaying the schemes introduction until 2012.

A new pensions bill will be introduced in the Queen’s Speech in November including the reforms, possibly followed next year with a national pensions savings scheme which will require firms to make compulsory contributions.