I'm not sure I completely understand what you mean. I realize that the motor is not using a timing belt to drive the spindle, however, the encoder is attached to the spindle shaft and not the motor shaft so it is getting it's reading directly from the spindle - not from the motor. I don't see how this would be a problem, maybe you can you explain?
My understanding of the original encoder setup is that the 60 ppr (A) channel was used to measure speed and the 1 ppr indexing (Z) channel was used for spindle positioning (threading). The B phase was apparently bypassed altogether.