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The triple lock “hot potato” has finally been grasped, although the policy has helped to improve pensioner living standards and is particularly relied upon by people on low incomes, experts have said.
Prime Minister Andy Burnham said that from April 2030, Labour plans to adjust the triple lock, which is used to increase state pensions each April.
The state pension overhaul will help to fund a new National Care Service in England.
Under the plans, the state pension will continue to rise every year at least by CPI (Consumer Prices Index) inflation or 2.5%.
The door would still be left open to it rising by more than this if needed in some years, so that the state pension holds its value relative to average worker earnings.
State pensions are already expected to equate to around 30% of average earnings by the end of the decade.
In his Labour conference speech, Mr Burnham said that the state pension “will hold its value relative to earnings over time so that pensioners will always share in the rising prosperity of the nation”.
The current formula means that the state pension rises each year by total earnings growth in the year from May to July of the previous year, CPI inflation in September of the previous year, or 2.5% – whichever is higher.
Patrick Heath-Lay, chief executive officer of People’s Partnership, provider of People’s Pension said: “An effective pensions system should ensure that the state pension, alongside minimum workplace pension contributions, provides an adequate standard of living in retirement for everyone.”
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He said the plans for an overhaul of state pension increases from 2030 mean “the case for higher contributions into workplace pensions has become much stronger”.
Adam Cole, a retirement specialist at wealth manager Quilter, said: “The triple lock has undoubtedly succeeded in improving pensioner living standards and protecting retirees through periods of high inflation, but growing longevity, demographic pressures and rising state pension costs mean questions about its long-term affordability and sustainability can no longer be avoided.
“For too long, reform has been tossed from government to government like a hot potato that no-one wants to keep.
“However, any discussion about reform must begin with a clear understanding of how important the state pension remains to millions of people.
“Our latest retirement lifestyle report shows it accounts for almost a quarter of retirement income on average, while among retirees aged 65 to 79 with incomes of £25,000 or less, it provides 57% of their retirement income.
“For over-80s on below-average incomes, it accounts for 54% of what they live on.
“This is not simply a debate about public spending, but about the financial security of current and future retirees.”
He said the commitment to ensure the state pension holds its value relative to earnings over time “is particularly significant because it suggests earnings will continue to play an important role within the future framework. However, the devil will be in the detail.”
Mr Cole added: “The practical design of the system will ultimately determine how well it balances sustainability with pension adequacy.”
He also said future retirees may also be more reliant on the state pension than many pensioners are today, as defined benefit (DB) pensions which guarantee a retirement income become more thin on the ground.
Rachel Vahey, head of public policy at AJ Bell, said: “Scrapping the triple lock cannot solve the national care problem on its own.”
She said: “Spending on the state pension is now £16 billion per year higher (according to Institute for Fiscal Studies figures) than it would have been in the absence of the triple lock. But that increase has been built up over 15 years.
“Those spending increases are now baked into the state pension.
“Moving away from the triple lock is not about reversing those increases. Instead, it means reducing the cost of future state pension increases.”
Jonathan Cribb, deputy director at the IFS, said: “For years, we at the IFS have been calling for the Government to find a better way to increase the state pension than the triple lock.
“The old triple lock is not a good way to achieve any policy goal. Most importantly, it is both very expensive and very unpredictable.
“The new, reformed triple lock from 2030–31 is not perfect, but it is a substantial improvement on the status quo.
“The Prime Minister should be commended for grasping the nettle and helping to put the state pension system on a more secure and sustainable footing.”
Maike Currie, VP personal finance at PensionBee, said: “This is ultimately a trade-off: pensioners giving up the protection of the earnings element of the triple lock in return for greater protection from potentially catastrophic care costs.
“The state pension is the foundation of retirement income for millions, while the unpredictable cost of care can quickly eat into pensions, savings and housing wealth built up over a lifetime.”
Zoe Alexander, chief policy officer at Pensions UK, said: “The triple lock has played an important role in restoring the value of the state pension and giving millions of older people greater financial security.
“Pensions UK has recognised for some time that eventually it would need to end.
“We’re pleased that the state pension will stay ahead of prices, but how it’s assessed relative to earnings will be critical.
“We would like to see an independent body assess overall pensions adequacy on a regular basis to ensure living standards are safeguarded as part of an overall package of reform.”
Caroline Abrahams, charity director at Age UK said: “The Prime Minister’s commitment to social care reform is hugely welcome, after decades of dither and delay.
“A modern, progressive social care system, free at the point of use, would be transformational for older and disabled people, and their families too.”
She added: “For a generation, the triple lock has given older people confidence that the value of their state pension won’t be eroded in an uncertain and volatile world, and now the Government wants to change it from 2030, when their manifesto pledge expires.
“Pensions policy is notoriously complex so we postpone judgment on the overall impact of their proposed reform until we can scrutinise the detail.
“However, much will depend on where we are by 2030, including what level the state pension has reached by then.
“We will need to be absolutely certain that those who are reliant on the state pension alone can attain a decent standard of living, and that means the Government must have a cast iron plan to ensure no-one is left behind.”
Ms Abrahams said: “Pensioner poverty has not been vanquished and the last few years show how insidiously it can come creeping back if governments look away.
“Protecting those older people who are vulnerable, or on the lowest incomes, should be the ultimate test of this Government’s reforms – it can’t be social care or financial security. In a civilised society, it must be both.”
