Labour has committed to increase the basic state pension in line with earnings from 2012, a move which dashes savings of £2bn a year by the end of the next Parliament, says Towers Watson.

In a decision that is aimed at securing the 'grey' vote, the financial consultant is concerned that Labour's change of heart, from originally vowing to increase the basic state pension in line with earnings from 2012 but only being committed to do so from 2015, also wipes a potential £4bn a year in the long-term to 2015.

In May 2006, the Government said the restoring of the earnings link by 2012 would be 'subject to affordability and the fiscal position', but today's manifesto states: "we will restore the link between the basic state pension and earnings from 2012".

2006 estimates by the Government showed that the annual cost of the earnings link for the basic state pension would be £1.9bn higher in 2006/7 prices by the end of the next Parliament, should it commence in 2012 rather than 2015. By 2050, this extra cost was estimated at £4.2bn.

"The public finances are in much worse shape than they were when the Government said it would have to wait and see if restoring the earnings link in 2012 was affordable," commented John Ball, head of defined benefit pension consulting at Towers Watson. "Today's announcement says more about the power of the grey vote than about the outcome of any affordability test.

"However, the main cost comes from linking the basic state pension and pension credit to earnings at all - it was always slightly absurd to say that this long-term commitment might not be affordable in 2012 but would definitely be affordable by 2015. The package of reforms that came out of the Turner Report added to future spending on pensions and left it to future generations of politicians to work out where the money would come from. Introducing the earnings link from 2012 rather than 2015 would make the challenge of finding those savings a bit harder."

The manifesto also outlines Labour's plans to continue with the new pension offering from the Government from 2012, although neglects to name it as the National Employment Savings Trust (NEST). Instead, the manifesto states that the new "Personal Pension Accounts" will ensure that everyone in work is entitled to matched contributions from employers and government.

The Personal Accounts Deliver Authority (PADA) declined to comment on political parties or get involved in political matters.

The manifesto also sees Labour pledge to look at pensioner poverty, with pension credit rising in line with earnings, and Labour will promote flexible working, and proceed to end default retirement at age 65. The right way to support people to work longer, should they choose to do so, will be reviewed, and "to expand the choices available for those wishing to work after retirement, we will enable people aged 60 and over to claim Working Tax Credit if they work at least 16 hours a week, rather than 30 hours as at present".

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