The Future of the Triple-Lock State Pension System
The triple-lock mechanism on state pensions has long been a fundamental aspect of the UK’s retirement framework. However, an eminent expert has raised serious concerns about its sustainability and efficacy as a long-term strategy. Jonathan Cribb, an associate director at the Institute for Fiscal Studies (IFS) and a specialist in retirement, savings, and ageing, shared his insights with The i Paper: “Ultimately, you can’t keep the triple-lock forever; it’s clearly unsustainable. Some in politics may disagree, but the reality is undeniable.”
Established in 2011, the triple-lock guarantees that state pensions will increase each year by the highest of inflation rates, average earnings growth, or a minimum of 2.5%. While this policy has led to significant increases in state pension amounts over the years, it also comes with a hefty price tag. The IFS estimates that the triple-lock adds approximately £11 billion annually to government expenditures, with projections indicating that by 2050, its cost could soar by anywhere from £5 billion to £45 billion each year, depending on the economic landscape.
Cribb elaborated, “If the economy performs exceedingly well in the next 15 years, then the triple-lock may not have much impact. Conversely, if the economy struggles, it will impose a heavy financial burden. This situation poses challenges for public finances.” Currently, Labour faces increasing pressure to rethink how the state pension—valued at £221.20 per week for new recipients and £169.50 for those on the old rate—is adjusted each year. Nevertheless, any alteration to the triple-lock carries significant political risks. At a recent Pensions and Lifetime Savings Association (PLSA) investment conference in Edinburgh, Pensions Minister Torsten Bell confirmed that while the government has no plans to abolish the triple-lock during this Parliament, its future remains uncertain.
Considering a Double-Lock System
One potential alternative is a transition to a “double-lock” system, which would eliminate the 2.5% guarantee and tie state pension increases solely to inflation and earnings growth. However, Cribb expressed skepticism about whether this would effectively resolve the underlying issues, stating, “A double-lock isn’t significantly better than a triple-lock in terms of reliability.” The Isle of Man had initially planned to replace its triple-lock with a double-lock but has since reversed its decision, highlighting the political complexities surrounding pension reform.
Cribb cautioned that even under a double-lock framework, state pensions would likely continue to rise at a rate that exceeds both earnings and prices in the long run, rendering it financially untenable. Instead, he advocates for an IFS proposal, initially recommended by the Work and Pensions Select Committee in 2015, advocating for a “smoothed earnings link.” This approach would connect state pensions to earnings while also allowing for additional pension top-ups during periods of high inflation, alongside a claw-back mechanism to prevent excessive compounding of increases relative to earnings. Bell has previously endorsed this concept, asserting, “Transitioning pensions to the same smoothed earnings link proposed for working-age benefits could gradually save 0.5% of GDP compared to current plans by the 2040s, which would offset over half of the increased costs associated with linking working-age benefits to wages.”
This approach differs from the triple-lock in that when wages fall below inflation, pensioners would receive an increase aligned with inflation—resulting in higher benefits than workers. However, when wage growth outpaces inflation, pensioners would also benefit from this rise. Consequently, over time, their gains would compound, allowing their pensions to increase at a significantly faster rate than that of the working population.
Addressing Growing Poverty Rates
The triple-lock is not the sole concern facing the UK’s pension landscape. Cribb warned, “We are grappling with unsustainable public finances, and at some point, the state’s capacity to provide more assistance will need to be curtailed.” The rising state pension age has already contributed to increasing poverty rates among individuals in their mid-sixties, who may be unable to work but are not yet eligible for state pensions. He emphasized the need for a new approach, likely involving enhanced protections for individuals in their mid-sixties prior to reaching state pension age, as well as a comprehensive strategy regarding private savings for retirement.
Should Minimum Contributions Be Increased?
The private pension system also presents its own set of challenges. A significant number of middle-income earners are failing to save adequately for retirement, yet there has been minimal political will to raise mandatory contribution rates. Cribb remarked, “We seem to be at an impasse regarding the minimum contributions currently in place, and there appears to be no political momentum to increase these rates.” The IFS advocates for a more flexible savings approach that encourages individuals to save more during financially stable periods—particularly in their fifties when financial obligations like childcare costs have typically diminished.
“Savings should be about reallocating resources from periods in your life where you have a surplus to times when you are in need,” Cribb explained. Labour’s second phase of the pensions review is anticipated to tackle some of these pressing issues, but any substantial changes are likely to take years to materialize. He cautioned, “Any decisions made will probably take a few years to implement, ensuring that people receive adequate notice,” adding that it may be quite some time before these changes become a reality.
Concerns for Recipients of the Old State Pension
Another pressing issue is that some older pensioners remain on the less favorable pre-2016 state pension scheme. Cribb noted that in 10 or 15 years, there will still be individuals alive who are not receiving the new state pension simply because they were born on the wrong side of the reform line. He remarked, “In the long run, this issue will resolve itself, but in the medium term, it represents a significant source of poverty for older adults.” One potential solution might involve gradually transitioning these pensioners to the new system, although this would necessitate considerable government expenditure.
Despite these challenges, Cribb does not view the current pension system as being in crisis. He stated, “I don’t believe the system is fundamentally flawed. There’s no immediate cause for alarm. However, I do think it would be prudent to expedite the second phase of the pension review.”
