The German government has won parliamentary approval for crucial legislation on pension reforms.

The centre-left coalition of Chancellor Gerhard Schroeder won enough votes in the Bundesrat - the upper house of parliament - to amend rules governing the country's generous system of public pensions.

Under the plans, state pensions will be reduced gradually to 67% of average earnings from 70.1%, while workers will be encouraged to build up private contributions to complement what the state gives them.

The government viewed the reforms as necessary because Germany's rapidly ageing population is putting increasing pressure on the state pensions system.

It has estimated that the proportion of retired people to workers will rise to 56% in 2040 from 25% in 1999.

AVCs allowed

Holger Fahrinkrug, senior economist at UBS Warburg investment bank in Frankfurt said the passing of the legislation was good news.

But he added: "The solution could prove to be short-lived as a constitutional court ruling expected next year is likely to demand more profound change."

Many elements of the reform package were approved by the Bundestag - the lower house - in January and have become law but the upper house had continued to block some important elements.

Bundesrat approval was viewed as the final hurdle for Mr Schroeder in pushing through the reforms.

Last summer, he fought, and won, a similarly hard battle to get a major package of tax reforms approved.

The pension reforms are intended to keep state pension contributions below 20% of wages until 2020.

Workers will be allowed to make additional voluntary contributions (AVCs) of 1% of their gross salary from 2002, rising to 4% by 2008.

The contributions will be encouraged by tax breaks that might cost the government as much as 20bn Deutschmarks ($9bn) a year.