A fair pension for every generation: a Liberal Democrat case for reform

 (Image: The Guardian) 

I was 18 years old when I opened a bank account with the Royal Bank of Scotland. It was my first experience of aggressive salesmanship.   

I thought all I was doing was taking in some pieces of identification, confirming some information and opening a bank account. But no. I had a half-hour appointment with an advisor who was keen to offer me pretty much every other product the bank had available. Inevitably the conversation came round to the subject of pensions.

He asked me whether I had thought about pensions. I'd just turned 18 years old a few days before and told him that I really hadn't, they were not something I was particularly interested in and I would have plenty of time to think about it in the future. But he didn't accept that as an answer. He kept pressing. He didn't persuade me to do anything, but there is a reason I bring this up now.

During the five minutes or so in which he basically tried to bully me into opening a pension, he said something that has stayed with me: "When you reach retirement age, there will no longer be a state pension."

That was all the way back in 1995. I don't treat what he said as a prediction because it wasn't - it was a sales tactic. But it sticks with me not just because it was unnecessary fearmongering, but because it made an impression for another reason. Pensions are only good if they are sustainable, and they are only fair if I will later be able to receive the same benefit as those who pensions I, as a taxpayer, am currently paying for.

Liberal Democrats should approach pensions through our commitment to freedom, dignity and fairness. Nobody should spend their retirement choosing between heating and eating. Equally, promises made to today’s pensioners must be affordable for the people whose taxes support them—and credible for those who will retire tomorrow. Young people who are the same age now as I was back in 1995 shouldn't have to worry about whether there will be provision for them at the end of a working life they may not yet have started.

Andy Burnham’s conference proposal deserves to be considered in that spirit. From April 2030, he proposes retaining annual increases of at least inflation or 2.5%, while maintaining the state pension’s relationship with earnings over time. That changes how the earnings protection operates; it does not abandon it.

This is not as radical as some are suggesting. Neither is it scrapping the triple lock. And it certainly isn't stealing from pensioners.

To be precise, it replaces the existing annual formula with a different arrangement retaining three protections. This deserves honest debate, but describing it as theft obscures the question we should be asking: what combination of pensions, income support and care best secures dignity in later life?

The intemperate reactions we have seen from various quarters haven't helped the conversation. Yet this is a conversation that needs to be had. The conversation also needs to be rational, informed and focused on addressing need rather than political expediency.

The triple lock’s limitations

The triple lock was introduced in 2011, a Liberal Democrat idea brought in by Steve Webb aimed at ensuring pensioners' income did not fall behind the rest of society. It increases the basic and new state pensions each year by the highest of earnings growth, inflation or 2.5%. It helped repair the erosion of the state pension’s value and provides protection that pensioners understandably value.

However, it isn't without weaknesses. A key problem is that it achieves these objectives through a permanent ratchet, rather than an agreed destination for pension adequacy. It is also a blunt instrument for tackling poverty. A pensioner with substantial investment income and a comfortable occupational pension receives the same percentage increase in their state pension as someone wholly dependent on it. 

That does not necessarily make a broadly available state pension undesirable. Such provision offers simplicity, security and public legitimacy. Nor should we overlook how much more a pension increase matters to someone with little other income. But when the leader of the Liberal Democrats condemns the Prime Minister's proposals around the triple lock as stealing from "the pockets of our poorest pensioners" it raises questions about whether he genuinely understands how the triple lock works and whether there may be better means of actively supporting "our poorest pensioners". An across-the-board uprating formula cannot and does not distinguish between comfortable retirement and severe hardship.

Pension Credit addresses a different task: topping up the incomes of eligible pensioners. Because state pension income counts in its calculation, an increase in the state pension can be offset by a reduction in Guarantee Credit if the guaranteed minimum is unchanged. The poorest pensioners therefore need more than a promise about annual state pension increases. They need an adequate total income, accessible benefits and help with the costs that drive hardship.

Fairness between generations

The state pension is largely financed from current public revenues. Its affordability consequently depends on the economy and tax base supporting it. It is not, contrary to popular belief, a personal investment account accumulated by each recipient.

The triple lock creates an asymmetry. When inflation exceeds earnings growth, pensioners receive protection against rising prices. When wages subsequently recover, the existing formula awards the full earnings increase on top of that earlier protection. Repeated fluctuations can therefore push pensions progressively higher relative to wages.

This is something recognised by the Resolution Foundation, a think-tank focused on improving living standards for those on low to moderate incomes. The Foundation argues that "pensioners have seen three times as much living standards growth as non-pensioners over the last two decades, a typical pensioner household now has the same level of income as the typical working-age household, and pensioners are less likely to be in poverty than the rest of the population. There is not a strong case for continuing to increase state support for pensioners faster than the wages of typical workers."

Protecting pensioners during an inflation shock is reasonable. Permanently increasing their share of national earnings because of the sequence of economic shocks is harder to justify.

The additional spending has an opportunity cost. It must be supported by taxation, borrowing or choices elsewhere in public spending. Those choices matter to younger people trying to afford housing, raise children and save for their own retirement - all at a time when intergenerational inequality is widening.

A Liberal Democrat approach should protect hardship at every age and ask more of those with the greatest means. It should also recognise that today’s younger workers are tomorrow’s pensioners. They need a dependable state pension.

It is understandable that many Liberal Democrats feel proud of the triple lock as one of the great achievements of the coalition years. However, while it did achieve much of what it set out to do, in the words of the Resolution Foundation "it was always a poorly designed, unfair, arbitrary ratchet that we could never afford". If we're being realistic, if this had been a Conservative rather than Lib Dem idea, would our leadership still be passionately defending it 15 years later despite evidence of its weaknesses?

We need to be honest about the triple lock. Sadly, among the largely positive reactions to the Prime Minister's speech there has been a fair amount of disingenuousness from those defending the triple lock. Ed Davey, on BBC 4 Today, argued that the triple lock needs to be retained to "help millennials", a claim that Tom Gordon MP said "is at best for the birds, and at worst downright insulting." If we are determined to keep the triple lock, then we need to find compelling reasons to do so.  Pretending the triple lock is safeguarding younger people is either unforgivably dishonest or economically illiterate. 

Why the triple lock is unsustainable

Britain is not about to become incapable of paying pensions. The problem is that the present formula commits us to an increasingly expensive benefit that in the longer-term will become inviable. The State Pension simply cannot continue to rise forever by more than the earnings of a typical worker.

Population ageing creates spending pressure independently of the triple lock.  The number of people aged 16-64 for every person aged 65+ projected to fall from 3.3 to 1.9 between 2025 and 2075. The Office for Budget Responsibility’s July 2025 report described long-term projections in which state pension spending will reach 7.7% of GDP by the early 2070s, approximately half as much again as its current share. These are conditional projections, not inevitable outcomes, but they demonstrate the scale of the challenge.

There is nothing inherently wrong with choosing to spend more on retirement. But that choice should be deliberate and funded. An arbitrary annual minimum of 2.5%, combined with whichever economic indicator happens to rise fastest, is an inadequate substitute for a long-term settlement. The Prime Minister's proposal is mere tinkering and doesn't even begin to deal with the bigger questions.

Burnham’s proposal addresses the permanent ratchet (to a degree) while retaining price protection and an earnings relationship. The Institute for Fiscal Studies welcomes that change, but also argues that the surviving 2.5% floor remains potentially costly and that reform alone is insufficient to fund universal social care. The sustainability problem remains.

Liberal Democrats should scrutinise these weaknesses. We should demand credible care funding and a clear pension formula. But rather than simply doubling down and defending the status quo, as if the triple lock is sacrosanct, we should seek to promote an alternative vision for the future of pensions in which everyone can count on dignity and financial security in retirement. That means a stable, predictable system that protects purchasing power, shares rising prosperity and remains sustainable over the long term. Above all, it must be equitable - providing stronger support for those with the least, recognising lives spent in low-paid work or unpaid care and sharing the costs fairly according to ability to pay, both within and between generations.

What Britain can learn from Europe

On social media, many accounts supporting retention of the triple lock have circulated misleading memes suggesting that the UK has the lowest highest pension rate in Western Europe, yet is the only one to be "unsustainable". Such accounts also tend to characterise the Prime Minister's proposal as a "pensions grab".

Such simplistic arguments contain a grain of truth, but the comparison is not a like-for-like one. I think it is helpful to look at Europe, not because all of their pension schemes are sustainable (they aren't) but because there are viable alternatives to doing things in the same way and merely tinkering a bit around the edges.

Iceland, the Netherlands and Denmark offer particularly useful lessons because they combine public retirement provision with extensive funded pensions. Their systems spread responsibility across the state, employers and individuals.

In Iceland, mandatory pension saving sits alongside targeted public provision. The OECD reports mandatory funded pension contributions of 15.5% of salary, comprising 4% from employees and 11.5% from employers. This builds substantial retirement resources through working life, reducing reliance on the public pension alone. 

The Netherlands combines its basic state pension with extensive occupational provision. Its pension system is undergoing a transition towards defined contribution arrangements, illustrating that even mature funded systems must adapt how they allocate investment and longevity risks.

Denmark combines a basic public pension, means-tested supplements, a funded supplementary pension scheme and occupational pensions negotiated through collective agreements. Its public basic and safety-net benefits are linked to wages, helping preserve their relative value. Retirement-age links to longevity also form part of its approach to sustainability.

These arrangements offer principles Britain can adopt, rather than ready-made systems we can import. Wider pension coverage, stronger employer contributions, efficient collective provision and dependable minimum incomes are all relevant.

But funded pensions take decades to mature. Increasing saving today does not pay today’s state pension bill. Higher contributions also have immediate consequences for wages, household budgets and employers.

Investment returns are uncertain, while people with low pay or interrupted careers cannot accumulate adequate pensions simply by being instructed to save more. Funded provision therefore needs public support and strong governance. It complements an adequate state pension; it cannot and should not replace the safety net.

What would best help the poorest pensioners?

This is the most important question, and one our leadership should be asking if it is serious about addressing need rather than using pour "poorest pensioners" as a convenient stick with which to beat the Prime Minister. The starting point should be a guaranteed minimum retirement income, assessed against actual living costs and reviewed regularly. That guarantee must allow for the additional pressures facing renters, disabled people and those living alone.

Pension Credit provides an existing foundation, but its delivery is inadequate. DWP estimates for the financial year ending 2024 indicate that up to 910,000 eligible families did not claim it, leaving up to £2.5 billion unclaimed. An entitlement that people cannot navigate or do not know exists fails its purpose.

A solution to this could be government agencies using administrative data to identify likely eligibility and offer proactive assistance. Alternatively, it may be time to move to a more fit-for-purpose system.

If our objective is to tackle pensioner poverty, we should design a system around that objective. The triple lock increases state pensions without asking whether someone has enough to live on and without doing anything to specifically help those Ed Davey describes as "the poorest pensioners".  A fairer alternative would direct greater support towards those with the smallest incomes and the greatest unavoidable costs.

Pension Credit has a purpose but is also problematic. It should be turned into a guaranteed retirement income, one delivered automatically wherever possible with straightforward assistance where further information is needed. Its level should reflect an independently assessed minimum living standard and be protected against both rising prices and falling behind the prosperity of the wider population. Unlike the triple lock, this would establish an explicit promise around minimum income.

A more radical option - and liberals should be radical - would be a higher, broadly available state pension, with the additional expenditure recovered progressively through taxation from pensioners with substantial total incomes. This would reduce dependence on means-tested claims while concentrating the net benefit on poorer pensioners. It would require careful costing and a fair transition, but its principle is clear: provide a dependable pension entitlement, then ask those who can afford it to contribute more. Broad entitlement need not mean equal financial benefit regardless of means.

We should also challenge the assumption that a secure retirement must depend so heavily on an uninterrupted record of paid employment. A stronger residence-based pension entitlement, with appropriate qualifying rules, could protect people whose working lives were disrupted by illness, insecure employment or unpaid care. This would address gaps in entitlement that the triple lock merely carries forward.

Fairness also requires recognising that the same income buys very different living standards. A pensioner paying private rent may face hardship on an income that allows a mortgage-free homeowner to live comfortably. A retirement income guarantee should therefore be accompanied by adequate housing support and additional payments for disability and unavoidable care costs. 

These proposals would be better tools than the triple lock for helping the poorest because they address the reasons people lack an adequate retirement income: insufficient entitlement, missing support or high essential costs. Their success should be measured by how far they reduce poverty and improve disposable incomes after housing and disability costs. 

The Liberal Democrat ambition should be a retirement settlement in which security is guaranteed, additional needs are recognised and contributions reflect ability to pay. Defending the triple lock is no substitute for building a genuinely equitable arrangement.

A sustainable Liberal Democrat alternative

I would advocate a settlement with three connected elements.

Firstly, establish an adequate state pension and maintain its relationship with earnings through a transparent, smoothed earnings link. Protect purchasing power when inflation exceeds wage growth; once wages recover, allow the earnings benchmark to catch up before awarding further increases above inflation. This preserves security without permanently compounding every temporary shock. The IFS has proposed such an approach, which also removes the arbitrary 2.5% minimum.

Secondly, strengthen the guaranteed minimum retirement income and make it much easier to receive. Any reform should include explicit protection for the poorest. Housing and disability costs must be addressed alongside ordinary living expenses.

Thirdly, improve funded pensions for future retirees. Extend effective coverage to people poorly served by existing arrangements, including self-employed people and those with several small jobs. Raise contributions gradually where affordable, with greater employer participation and targeted support for low earners and unpaid carers. 

These ideas are merely suggestions designed to offer a broad direction for reform rather than a detailed policy proposal. If anything, I am simply attempting to start a conversation. My hope is that those within the party with expertise in pensions, taxation and social security can develop a credible alternative to the status quo: one that offers greater scope than the triple lock to put Liberal Democrat principles of fairness into practice and ensure that no-one is enslaved by poverty in retirement. That means protecting the poorest, recognising different needs and circumstances, and sharing the costs equitably within and between generations, while providing lasting security in retirement.

The Liberal Democrat test should be whether people gain real security and freedom. A sustainable pension protects future generations from broken promises. An adequate income floor protects today’s poorest pensioners from hardship. Properly funded care protects people from losing their independence when their needs increase.

Those goals belong together. Our responsibility is to design a system that achieves them.