Under a compromise deal, which has still to be ratified by some union leaders, all existing employees will be able to retire at 60 without loss of benefit. New entrants will continue to enjoy a final salary scheme with defined benefits but they will retire only at 65, unless they make extra contributions. Unions welcomed the offer ­ which will be the subject of a consultation exercise among members ­ but they pointed out the outline agreement did not apply to more than one million local government workers. Brendan Barber, the general secretary of the TUC, said the same protection should be afforded to local authority staff, but hailed the deal as a major breakthrough "This is a real change of heart by the Government. The guarantees we have been given were simply not there before.

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We have managed to persuade the Government they needed to think again," he said. The agreement provoked a row between employers and ministers. Sir Digby Jones, director general of the CBI, argued taxpayers would have to pay for the "capitulation", but the Work and Pensions Secretary, Alan Johnson, contended the deal would save the £13bn the Government originally intended to save. Sir Digby said: "This is a bad deal for the taxpayer, the Government has capitulated to the threat of public sector strikes and conceded that 21-year-old civil servants can retire aged 60 in 2044. Lucky them." Mr Johnson responded that unions had agreed to savings meaning the deal remained "within the cost envelope". New entrants made up a large proportion of staff because of high turnover.

"The good news that we are living longer means pensions have to adapt," he said. "It's been happening in the private sector and today's agreement means it will happen in the public sector." Mark Serwotka, leader of the PCS civil service union, said the agreement was "a fantastic achievement". Dave Prentis, leader of the public service union Unison, welcomed the deal but added: "We want the principles established here to be applied to the local government scheme.". A refusal by the United States and German embassies to pay the capital's congestion charge has led to a diplomatic row with the Government and London's Mayor, Ken Livingstone. Since early summer, staff at both embassies have been amassing fines, believed to run into thousands of pounds, because of their refusal to pay the £8 daily charge - claiming it is a tax, from which diplomats are exempt. Although all other embassies are believed to be paying the charge, many might now decide to follow the lead of America - which has the most embassy staff - and Germany.Both embassies are likely to figure prominently on the Foreign Office's next "list of shame" of parking fines and other infringements by diplomats - to be published later this year.The £8 charge - which has been criticised by many businesses and residents - applies to all cars entering the central London area during office hours from Monday to Friday. However, residents, who would include many diplomats, qualify for a 90 per cent discount.A spokesman for the US embassy said its diplomats always paid parking charges and fines but it had received advice from the State Department in July that the charge was a tax and, under the 1961 Vienna convention on diplomatic relations, was not enforceable on diplomats. "We consider it a tax and it is the view of the US government that all direct taxes on diplomats, including this one, are prohibited by the Vienna convention."A German embassy spokesman said: "We received a memo from Berlin several months ago which explained the congestion charge is considered to be a tax and therefore diplomats are exempt."Transport for London said that so far as it could establish, the two were the only embassies refusing to pay the charge; the US has formerly been a subscriber to its fleet payment system but had withdrawn in July.