PORTUGAL - Portuguese state pensions are going to be indexed to the country's economic performance and life expectancy under new reform plans.

The changes will see the retirement age increase with life expectancy over the coming years. However, workers can still retire at 65 in the future if they accept cuts in their pensions. These can also be avoided by paying more into the social security system.

The ruling Socialist Party (PS) and labour organisations struck a deal after five months of negotiations in an attempt to reform the country's very generous pension system - equivalent to around 80% of final salary.

"The new legislation is going to move the system to a career average scheme from next year onwards," Bernie Thomas at Watson Wyatt's Portuguese offices told IPE.

"I wouldn't say it is a dramatic change but it certainly is part of a fine tuning process. If I was to bet I would say that something else will be happening in the medium term.

"Because we don't believe that what's been put in place now is going to be sustainable forever. There is still this imbalance in the demographic profile, in terms of how businesses want to reward their employees.

"So there will be future pressure on the state to have a look at the situation again and introduce further changes."

Pension increases - both for future and already existing pension benefits - are going to be tied to economic performance as well. At the moment they are linked to inflation - this will be replaced by a complex calculation matrix, Thomas explained.

No increases are going to be granted to people receiving a pension in excess of €4,500 per month.

Under the new regulations it will also be harder to take early retirement through the unemployment route. "The government is really trying to tighten up how much money it is spending in terms of its social security liabilities," Thomas said.

The government's suggestion of raising taxes and pension contributions for workers with fewer children was not adopted.

Parliament, in which the PS has a majority, will debate the regulations over the next month.