The OECD has today issued an Economic Survey of the UK, urging ministers to axe the state pension triple lock and replace it with a system that is "both effective and fair." The international body warns that the current mechanism, which it describes as "unusually generous," risks creating further rises in the state pension age, tax increases, or cuts to public spending.
Triple lock mechanism under fire
Introduced by the Conservative-Lib Dem coalition in 2011, the triple lock automatically increases state pension payments each year by the highest of wage growth, inflation, or a flat 2.5%. This year, the new state pension rose by £575 per year to £12,548, in line with 4.8% wage growth.
The OECD warns that the triple lock has created "sharp and unpredictable" increases in pension spending. 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."
The report highlights the impact 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."
Government urged to prepare reform
The OECD is now urging the government to start planning for the end of the triple lock. It recommends: "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."
The body stresses the need for careful phasing-in arrangements: "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."
Consequences of inaction
If the triple lock is not tackled, the OECD warns of potential consequences including further state pension age rises, tax increases, or cuts to public spending. It added: "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."
The report also states: "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."
Alternative models proposed
The OECD suggested a possible alternative model that would take an average of wage growth and inflation instead. It also pointed to the Australian model, which combines inflation protection with earnings growth.
The report explains: "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."
Political context
Labour included keeping the triple lock in its 2024 election manifesto and has committed to it for the rest of its term in Parliament. Andy Burnham, seen as a frontrunner to replace Sir Keir Starmer as prime minister, has suggested he would stick to the 2024 Labour manifesto when asked about scrapping the triple lock. HM Treasury has been contacted for comment.
