THE Government caved in to the unions last night by abandoning its plans to raise the pension age for three million public sector workers from 60 to 65.

Alan Johnson, the Trade and Industry Secretary, pledged to protect the final salary pensions of existing nurses, teachers and civil servants to avert a national strike throughout the public sector.

But, as part of the agreement brokered by the TUC, the Government will raise the pension age for future public servants by another five years, saving £13 billion over 50 years. The Government’s current pension liability is at least £380 billion.

Union leaders hailed the U-turn as a “major breakthrough”. But business chiefs accused Tony Blair of capitulating to the unions and claimed that it was a “bad deal for the taxpayer”.

Sir Digby Jones, the Director-General of the CBI, said that the Government had promised to tackle public-sector reform as a priority but was now pushing it into the long grass under pressure from union leaders. “Who is running Britain for the taxpayer — the Government or the unions?” he asked.

From April 2007 all new entrants to the public sector will normally have to work until they are 65 to get their full pension entitlement. Although details have still to be thrashed out, they are also likely to suffer worse terms and conditions.

New employees will be guaranteed defined benefit index-linked pensions and they will be able to retire early at 60 on a reduced pension if they wish. But the generous final salary schemes covering current public-sector workers may be switched to a scheme based on career average salaries.

DTI officials claimed that the Government was still on track to achieve the same level of savings as under the original proposals to bring in the changes for all workers under 52. About £26 billion will be saved over the next 50 years, of which £13 billion will be reinvested in protecting current workers.

But under the previous deal, which provoked strike threats by all the main public-sector unions, the £13 billion would have gone on better pension benefits for current and new staff.

While yesterday’s deal still has to be ratified by individual unions, most leaders seem prepared to protect current workers at the expense of new staff. Separate negotiations are still continuing over the pension arrangements for more than one million local council workers.

Brendan Barber, the TUC General Secretary, who brokered the deal, said: “This is a major breakthrough that public-service unions have secured. This is a real change of heart by the Government. The guarantees we have been given were simply not there before.”

The Government had also given important guarantees for the future, he said. “All new public pension schemes will be based on defined benefits, linked to earnings and index-linked. All public-service workers will continue to be able to retire at 60 if that is their wish into the future.”

Mr Johnson said: “Today’s deal means that public-sector workers will continue to get good quality pensions which are defined benefit but, like the state pension and pensions in the private sector, the normal pension age for new entrants will now be 65. Just like most private-sector pension reforms, the pension provision of existing scheme members will be protected.”

Dave Prentis, the Unison general secretary, said: “The Government has honoured its pension contract with the nation’s health workers. This is one part of the jigsaw, however, and we want the principles established here to be applied to the local government scheme.”

Mark Serwotka, the general secretary of the Public and Commercial Services Union, said that the agreement was a “fantastic achievement”, illustrating what trade unions could achieve by working and campaigning together.

But some union leaders were less happy. Brian Strutton, the national officer of the GMB, said: “This creates two-tier pensions in the public services, which the GMB has campaigned vigorously against.”

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