How the triple lock state pension could be scrapped – and what could replace it ...Middle East

Andy Burnham is facing growing pressure to scrap the triple lock on state pensions, which economists say could help fix the parlous state of public finances.

The British Chamber of Commerce (BCC) has – for the first time ever – called on Chancellor John Healey to abandon the policy, which ensures the state pension rises each year with whichever metric is highest out of inflation, wage growth of 2.5 per cent.

The BCC argued that ditching the triple lock and raising the state pension by inflation each year could save the Treasury £3.3bn over two years, which could be used to help repair troubled public finances, with councils facing large debts and the care system on the brink of collapse.

As the 28 October budget approaches, Healey and Burnham face a tricky balancing act of wanting to improve public services, ease the cost of living and boost economic growth – all while staying within the confines of their self-imposed public spending rules.

A growing number of voices have warned this can only be achieved with bold choices – such as scrapping the triple lock. Lord Jim O’Neill – the former Goldman Sachs chief economist who previously advised Burnham – urged the PM to “get real about “dealing with the triple lock” on the state pension, while Labour backbenchers have called for “bold” choices to release funds to help young people.

Here’s how the Government could navigate moving away from the policy – and what could replace it.

Pressure on the triple lock to be scrapped

The generous uprating system was introduced in 2010 to reduce pensioner poverty, but high inflation in recent years has seen costs balloon to around £146bn a year, equivalent to 5 per cent of GDP and more than double the entire defence budget.

The BCC’s director general, Shevaun Haviland, said “replacing the pensions triple lock” could help get the Government out of its “fiscal bind” by funding measures to support the nation’s million young people not in education, employment or training (Neet).

The group, which represents 65,000 firms employing 7.4 million workers, has argued that scrapping the policy could raise £3.3bn over two years to help fund cuts to employer National Insurance contributions for all under-25s.

The BCC states that such a tax cut would help “tackle the youth employment crisis” by encouraging more businesses to employ young people, which would reduce their reliance on state benefits and mean they contribute to the economy.

The organisation joins mounting calls to revisit the state pension system, which is widely deemed to be unaffordable and unsustainable.

Recently, Lord O’Neill said scrapping the triple would be a “golden” opportunity for getting a handle on public finances after borrowing costs hit a decades-long high last week. Sir Howard Davies, former chairman of NatWest, agreed, warning the country “can’t afford it”.

Former PM Tony Blair said it is “unaffordable long term”, and the Resolution Foundation – a think tank formerly run by pensions minister Torsten Bell – urging the Government to find the courage to phase it out.

Bell, who now oversees private and state pensions policy, previously described the triple lock as a “silly” system before he became an MP.

What could replace the triple lock? 

Several options have been touted for reforming the the system to make it more predictable and financially sustainable for the Treasury, while also continuing to support pensioners.

Here are all the main proposals for reforming state pensions.

Smoothed earnings link

The Institute for Fiscal Studies (IFS) and the Resolution Foundation have long favoured the Australian-style “smoothed earnings link”, which tracks wage growth but protects the value of the state pension from temporary price shocks.

In most years, the state pension would increase in line with average earnings growth. But in years where inflation surpasses wage growth, the pension would instead be pinned to inflation until earnings recover.

A similar system is used in Australia – but private pensions in the country are also more generous.

The IFS said this system would provide “greater predictability for both pensioners and policymakers”, while the Resolution Foundation said switching to it from next year could save around £650m in 2029-30.

Double or single lock

Another alternative would be a double lock, where the state pension increases each year by either average earnings growth or inflation – whichever is highest.

This would remove the guaranteed minimum increase of 2.5 per cent, which gives pensioners security that their payment will increase each year.

The IFS said it would not resolve the issue of the one-way ratchet effect, as the state pension would still rise faster than both earnings and prices in the long run and eventually become unsustainable.

The BCC has proposed a single lock, meaning the pension would increase each year according to inflation only.

Lifespan fund

The Tony Blair Institute (TBI) has proposed a more radical option, which involves scrapping the state pension altogether.

The former PM’s think tank has suggested replacing the state pension with a “lifespan fund” which allows individuals to build up credits via work and activities that can be converted into a guaranteed pension at retirement.

People would have the option of drawing cash during disruptions such as unemployment or taking on caring responsibilities, and the retirement age would be linked to individual health rather than a one-size-fits-all state-pension age.

But former pensions minister Steve Webb said the idea of linking state pension payments to individual health records and life expectancy was “deeply troubling”.

What could the consequences be?

While there have long been private murmurings from within Labour that the triple lock should be axed, many believe scrapping it would be politically toxic among older Brits – who are most likely to turn up to vote at a general election.

It’s also important to note that Labour committed to keeping the triple lock in the 2024 manifesto. U-turning on this could put Burnham in a tricky position.

But Labour backbenchers have increasingly spoken out against the triple lock, with former Cabinet minister Liam Byrne arguing for a “gradual move” away to fund support for younger generations.

Backbencher Graeme Downie saying the current system “isn’t working and it’s costing too much money”, arguing it should be scrapped to release money to boost defence spending. Ministers have outlined a commitment to increase the defence budget to 3 per cent, but have not yet said how or when this will happen.

Speaking to The i Paper a month before he became PM, Burnham said that “the manifesto commitment holds” on the triple lock – but he did not spell out whether he would look to maintain the policy beyond the current Parliament, which is due to end by 2029.

This is consistent with the current Government position on the future of the policy, and suggests there could be room for a long-term plan involving a move away from the triple lock.

Later in the year, the PM is due to set out a 10-year plan to raise living standards through reindustrialisation, housing, infrastructure and reform of essential utilities.

Prime Minister’s Official Spokesman: “We are committed to the triple lock, with millions set to see their state pension rise by £2,100 over the course of this parliament. The Government is committed to ensuring pensioners enjoy the dignity and respect they deserve in retirement.”

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