Should the state pension triple lock be scrapped?

The government is under growing pressure to reform the controversial triple lock on the state pension.

Set up under the Tory government in 2011, the triple lock is used to calculate how much the state pension should increase by each year.

Under the mechanism, the state pension increases annually by the highest out of average earnings, inflation or 2.5%.

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It has become an expensive policy commitment though, sometimes rising above inflation due to high wage growth.

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The Office for Budget Responsibility (OBR) has estimated that the triple lock will cost around £15.5 billion per year by 2029/30, which is three times more than originally forecast.

Critics warn that it creates a generational divide between pensioners and those still working, who do not benefit from increases of the same level.

Some groups, such as the Institute for Fiscal Studies, have even called for it to be scrapped.

Labour committed to maintaining the triple lock in its 2024 general election manifesto but the higher costs, ageing population and strained public finances mean there could be extra pressures to reform or scrap the policy.

Three separate reports in recent weeks, from the Tony Blair Institute for Global Change, the intergenerational foundation and the International Monetary Fund (IMF) have pushed for change, warning that the costs are becoming unsustainable.

Plenty of financial professionals agree that change is needed.

Martin Rayner, financial adviser at Compton Financial Services, said: “Welfare spending now exceeds income tax revenues and is still rising.

“At some point politicians have to decide whether they keep making promises or start dealing with reality.

“Reform is inevitable. Scrapping it outright would be politically toxic, but moving to a link based on earnings or inflation over a longer timeframe is far more likely.”

How could the state pension be reformed?

The government’s pension reforms may be more focused on getting people to save more for their retirement, but there is growing pressure to reform the state pension with lots of proposals raising alternatives to the triple lock.

The International Monetary Fund (IMF) this week warned the UK needs a “transparent public debate” on public spending and suggested reforms could include replacing the triple lock with a policy of indexing the state pension to the cost of living.

It comes as a report from the intergenerational foundation, Time to Unlock: Why it’s time to reform the triple lock on the State Pension, found that state pension spending has increased by almost 70% in real terms over the past two decades.

This year, the state pension is expected to cost around £146 billion, or around 5% of GDP, up from £86 billion in 2005/06, the report warns.

The think tank said its preferred reform would be to cap state pension increases at inflation until 2030/31 and then increase it by the average of inflation and earnings after that.

It said this would reduce the volatility associated with the triple lock while still preserving a link between pension increases and broader improvements in living standards.

This approach has also previously been recommended by the Organisation for Economic Co-operation and Development (OECD).

Perhaps the most extreme reform idea is from the Tony Blair Institute for Global Change, which has proposed totally replacing the current state pension with a new Lifespan Fund, which would effectively scrap the triple lock.

Instead of claiming the state pension once they've reached state pension age, people would build up credit in the fund through work and activities and can access it, for example if they need cashflow due to an unemployment spell of up to six months.

The think tank said this would only be permitted for those taking time out of work to “boost their future earnings potential or to engage in another socially useful activity”. This may include caring responsibilities.

Individuals would be able to choose when to retire and receive a personalised amount based on their age and life expectancy.

Its analysis suggests this could save the Treasury around £19 billion a year by 2035/36, rising to £38 billion a year by 2045/46. By the mid-2030s, that saving would be equivalent to almost £1,000 a year for every working household in Britain, according to the report.

Will the Labour government scrap the triple lock?

Scrapping the triple lock would be a pretty controversial decision, especially given Labour made a manifesto commitment to keep it.

But critics may argue that Labour also committed to not raising taxes, while some say it has scaled back commitments to leasehold reform.

There is a pretty big reason why Labour, or any government, won’t scrap the triple lock though.

Around a fifth of the population are of state pension age. That is a big part of the electorate to alienate if you reduce their future payments.

Research by AJ Bell shows that 38% of Brits believe the state pension triple lock should be made permanent, compared to just 6% who want it to be scrapped.

Unsurprisingly there is a significant generational divide, with more than two-thirds (68%) of ‘Baby Boomers’ angling for a permanent triple lock versus just 14% of Generation Z (aged 18-29) and 22% of Millennials (aged 30-45).

Tom Selby, director of public policy at AJ Bell, said: “The reason is almost certainly cold political calculus. A significant section of the public support the triple lock, particularly older voters, and any party indicating it will not pledge allegiance to the policy risks being annihilated at the general election.

“With inflation running hot, there may also be a feeling that the 2.5% underpin might not kick in for a while, meaning there are no guarantees ditching this element in favour of a ‘double-lock’ will actually save any money in the short term.”

Eamonn Prendergast, chartered financial adviser at Palantir Financial Planning, added: “It’s politically difficult to scrap — pensioners are a key voting group, but over the long term it becomes harder to justify in its current form. Reform is more likely than abolition, but any government that touches it risks a significant backlash.”

The government appears unlikely to budge for now.

Pensions minister Torsten Bell answered a parliamentary question at the end of April on state pension support where he reiterated the government’s commitment to the triple lock.

The bigger issue may be whether this government is able to make difficult decisions at all given potential leadership challenges.

Rayner, from Compton Financial Services, added: "Labour already appears politically paralysed, with every significant policy meeting backlash and a prompt U-turn. That makes meaningful reform harder, but delaying it simply means the eventual changes are likely to be far harsher."

An HM Treasury spokesperson said: “By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from the highest personal allowance in the G7.”

A spokesperson for the Department for Work and Pensions said: "Supporting pensioners is a priority and our commitment to the triple lock for the rest of this Parliament means millions of pensioners will see their yearly state pension rise by up to £2,100.”