THE spread of means-testing to help poorer pensioners is to be curbed to pay for generous increases in the state pension for all, The Times has learnt.

Under plans in today’s pensions White Paper to restore the link between pensions and earnings, from 2012 the basic pension would rise by 2050 to double what it would have been, ministers will say.

But Gordon Brown has decided to cap at the present level of 40 per cent the proportion of pensioners subject to means-testing, and in receipt of the additional pension credit, to free resources to pay for the earnings link restoration.

The Chancellor prepared the ground for shifts in his opposition to restoring the earnings link and on his attachment to means-testing in an interview with The Times on April 5.

John Hutton, the Work and Pensions Secretary, will hail a package that he says can turn Britain into a “nation of savers”. He will point out that spending on pensions as a proportion of national income will stay at 5.2 per cent until at least 2020. A new national pension savings scheme to assist low and middle-income earners to save at low cost will start in 2012.

Employees would be enrolled automatically unless they opted out. Employer contributions would be fixed at 3 per cent up to a maximum of £33,000 a year. There would be two Bills, one on restoring the earnings link this autumn and the second on the savings scheme in autumn 2007.

The retirement age would start to rise in the mid-2020s, going up a year per decade, reaching 68 by 2050. Thus through a combination of the earnings link and the savings scheme no one should be on means-tested benefits by 2050.

The costs would be partly financed by ending the national insurance rebate for those in contributory schemes. Eventually those in such schemes would pay an extra £7 a week, raising between £3 billion and £4 billion. Today’s paper will show that if the current link between the pension and prices were maintained, its value in relation to earnings would be halved by 2050.

The paper will set the “objective” of restoring the link in 2012 but, at the insistence of Mr Brown, this will be “subject to affordability and the fiscal position” at the time.

However, at the insistence of Tony Blair and other ministers, the paper will commit Labour to restoring the link by the end of the next Parliament, and the date would be announced at the start of the Parliament. Ministers have little doubt that Mr Brown, if he is Prime Minister, would go into the next election promising to bring back the link in 2012.

In a so far undisclosed move the Chancellor has decided to limit means-testing, a practice of which he has been accused of being too fond. Since it was introduced the pension credit threshold has been raised each year above the rate of earnings to increase the number of pensioners getting extra support.

From 2008 onwards Mr Brown has said that it should rise only in line with earnings, even though other ministers wanted that date delayed until 2015. That means the proportion of pensioners subject to means-testing would be capped at 40 per cent.

Mr Brown’s allies accept that he has moved, but that the changes would be done in an affordable way that would prevent the need for major tax rises. Lord Turner of Ecchinswell proposed bringing in the link from 2010 but accepted that would lead to a funding gap of £8.5 billion by 2020.

WHITE PAPER

Current state pension doubles by 2050

www.timesonline.co.uk/pensions

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