Britain will face a pensions crisis unless the link between the basic state pension and earnings is restored, John Hutton, the work and pensions secretary, said today.

The restoration of the earnings link – broken by Margaret Thatcher in 1980 – will be the centrepiece of the government’s proposed pension reforms, set to be unveiled in a white paper this week.

But we will have to work longer to pay for it. The white paper will include a proposal to increase the pension age to 68.

Mr Hutton would like to see the earnings link, which was one of the main recommendations of Lord Turner’s pension commission, restored by 2012. The pension is currently increased in line with prices, which tend to rise more slowly.

Talking on BBC1’s Sunday AM he said: "There isn’t a pensions crisis now … but there will be one if we don’t take action."

Figures from the Pensions Partnership show that, had the link not been severed in 1980, the full basic state pension of £84.25 a week, or £4,831 a year, would now be worth more than £110 a week, or £6,100 a year.

The government insists that the new pensions deal will not result in large tax rises. It claims the cost will be met by increasing the state pension age to 66 by 2030, 67 by 2040 and 68 by 2050. Bringing in the same retirement age for both men and women between 2010 and 2020 will also help.

The government will also indicate its support for the introduction of a new national pensions savings scheme (NPSS) to which workers will be automatically enrolled, although it is thought that savers will have to wait until later in the year for precise details.

All workers would be enrolled automatically, paying 4 per cent of their salary, with employers contributing 3 per cent and the taxman 1 per cent. People with alternative pension arrangements would be able to opt out.

Business groups such as the CBI have warned the Government that the NPSS will create a significant extra burden of costs for employers. Advisers have also said that companies offering more generous benefits could see the scheme’s introduction as an excuse to slash their contributions.

But the influential Treasury Select Committee, a cross-party group of MPs, today gave its backing to an NPSS type scheme.

The consumers’ association Which? has also come out in favour. Spokesman Mick McAteer said: "People on lower to average incomes will really benefit from the NPSS. These are precisely the people that the government has pledged to help out of the pensions’ black hole and who must be encouraged to save if the pensions crisis is to be solved."

For expert pensions advice visit www.timesonline.co.uk/pensions

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