The triple lock could be axed and replaced (Image: Getty)
The state pension triple lock must be axed and replaced because the “unusually generous” benefit risks creating more pension age rises, ministers have been told today.
The OECD has today issued an Economic Survey of the UK in which it sets out the case for ending the triple lock and replacing it with a new system which it says will be “both effective and fair”.
Currently, the state pension triple lock, introduced by the Conservative-Lib Dem coalition in 2011, automatically increases state pension payments each year by one of three metrics: wage growth, inflation, or a flat 2.5%, whichever is highest.
This year, for example, the new state pension was increased by another £575 per year to £12,548, in line with 4.8% wage growth.
Now, the OECD warns that the triple lock has created “sharp and unpredictable” increases in pension spending and is “unusually generous” compared with other countries.
It said: “On top of adding upward pressure on public expenditure, the triple lock amplifies fiscal uncertainty by increasing the sensitivity of pension spending to earnings and inflation shocks.
“In periods of macroeconomic volatility, when earnings growth and consumer price inflation exhibit large swings, the mechanism can generate sharp and unpredictable increases in pension expenditure. The issue is particularly acute following adverse terms-of-trade shocks, as during the 2021-2023 energy crisis, when prices first spike and then wages catch up, skewing risks upwards.”
Now, the OECD is urging Government to start planning for the end of the triple lock. It says: “The Government should prepare a medium-term reform of the triple lock. Given political economy challenges and the existing commitment to the triple-lock guarantee over the current Parliament, the government’s effort should focus on setting the ground for lasting reform.
“…Careful consideration of phasing-in arrangements for a smooth transition, as well as of distributional impacts, is an essential part of such preparations. Comprehensive consultations and clear communication with all relevant stakeholders are also required to build reform momentum.”
It adds that if the triple lock isn’t tackled, it could lead to further state pension age rises, tax increases, or cuts to public spending.
It continued: “Explaining how a new indexation mechanism will be designed to be both effective and fair is key to ensuring the public acceptability of the reform.
“An emphasis on distributional considerations will be important, including the fact that wealthier individuals live longer on average and thus benefit more from generous indexation. Clearly describing trade-offs will also be necessary, such as further rises in state pension age in the absence of reform or the need to increase taxes or cut public spending to address fiscal risks in the absence of reform..”
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The OECD said that a possible alternative model would take an average of wage growth and inflation instead.
It also pointed to the Australian model, which combines inflation protection with earnings growth.
It explained: “Pensions are indexed to consumer prices twice a year, preserving purchasing power. In addition, pension levels are periodically reviewed against a pre-agreed earnings benchmark and adjusted upwards if they fall below that level to ensure that pensioners continue to benefit from improvements in living standards. This benchmark indexation mechanism balances adequacy and fiscal sustainability.”
Labour included keeping the triple lock in its 2024 election manifesto, and says it has committed to the triple lock for the rest of its term in Parliament.
Andy Burnham, who is seen as the frontrunner to replace Sir Keir Starmer as prime minister, has suggested he would stick to the 2024 Labour manifesto when asked whether he would move to scrap the pensions triple lock.
HM Treasury has been contacted for comment.
