Tony Blair’s think tank has urged the Government to scrap the pensions triple lock amid concerns it is becoming increasingly unaffordable.
In a new paper published on Friday, the Tony Blair Institute for Global Change said the State Pension should be overhauled and the triple lock replaced with ‘smoothed earnings link’.
The triple lock guarantees that the State Pension will rise every year by whichever is highest: inflation, average wage growth or 2.5%.
However, the paper said the guarantee had become a ‘long run cost escalator’ for the Government, with spending on the State Pension set to rise from around 5% of GDP today to 7.8% by 2070 – an increase of more than £85 billion a year in today’s terms.
“If this isn’t addressed, it will steadily squeeze out other spending priorities or push taxes higher,” the paper said.
The organisation also highlighted a misalignment between the State Pension system and “what a modern safety net needs to do.”
It said that the State Pension system was designed for a world in which single-earner households were the norm and caring responsibilities were less likely to interrupt paid work, rather than one in which dual-income households often need more support to balance employment with caring for children and ageing parents.
“A modern safety net needs to provide more support during working life, through redundancy, retraining and caring spells, while offering more flexibility over how and when support is drawn in later life,” the think tank said.
The paper proposes replacing the State Pension with a new Lifespan Fund from 2030 – a flexible lifetime income-support account that individuals build up through active contribution to society.
Central to the new proposal is the replacement of the triple lock with a smoothed earnings link, which it says would maintain pensioners’ spending power while preventing pension costs from drifting higher. The think tank said a key goal for the Pensions Commission should be to broker a pre-election pact in which the main parties commit to this change.
Additionally, the Lifespan Fund would allow people to bring forward some of their State Pension entitlement during working life and then rebuild it when they return to work.
This would effectively be a loan from an individual’s own future pension, offering support during periods such as unemployment, retraining or caring, with the expectation that they would rebuild entitlement through higher National Insurance Contributions when they return to work.
The organisation said that each full year of contribution for recognised activity would add half a year’s State Pension to their fund. After 40 years of contributions, an individual would have built up a maximum entitlement worth around £250,000 in today’s prices, equivalent to 20 years support at the current State Pension level of around £12,500 a year.
However, arguably the most controversial and radical aspect of the reforms is the suggestion that State Pension income could be personalised based on an individual’s age and health.
The think tank suggested that the calculation could draw on an individual’s NHS health record, ensuring the system does not reward unhealthy lifestyle choices such as smoking.
As a result, those in poorer health with shorter life expectancy could retire earlier or receive higher annual payments, while those in better health might choose to delay retirement or accept a lower annual income.
The report said this “ensures that everyone receives roughly 20 years’ worth of support at the level of today’s State Pension in expectation, but they could end up receiving more or less than this depending on whether they lived for longer or less long than expected at the time of conversion.”
The proposal has attracted fierce criticism, raising questions around data confidentiality and the ability of health records to provide a definitive life expectancy.
Former pensions minister Steve Webb described the proposal as “deeply troubling.”
He said: “Leaving aside issues of confidentiality and data quality, it is very hard to make a precise leap from health records to life expectancy.”
Webb warned it would be a “huge backward step” to replace the current pension system with something “fiendishly complex and highly intrusive.”
Tom Selby, director of public policy at AJ Bell, agreed that some aspects of the paper would prove controversial.
“The report is absolutely right that the triple-lock will need to be scrapped at some point, but it also opens up a debate on whether the State Pension itself should be a stable foundation or a more flexible income people can tailor to their needs.
“Some aspects of the report could be a decent guide to future policy thinking. For example, moving to a smoothed earnings link to uprate incomes in retirement feels a reasonable compromise. Likewise, it isn’t completely inconceivable that people could be permitted to take State Pension income more flexibly at a younger age in exchange for accepting a discount.
“Even the idea of allowing people to access their ‘Lifespan Fund’ during periods out of work, topping up their entitlement with higher NI costs later on may also have some appeal.”
However, Selby described the prospect of the Government calculating a retirement income for each individual based on their personal health records as “somewhat dystopian” and warned that it would be vulnerable to people “gaming the system.”
“This approach comes with serious moral hazard and many people would inevitably feel aggrieved that their neighbour received a higher income due to poor health. There would clearly be an incentive for people to try and game the system by over-reporting health concerns too.
“The most radical ideas, like setting incomes based on personalised life expectancy and health data, will surely never get off the ground,” he added.
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