Former Conservative MP John Redwood has said the state pension triple lock is affordable and well secured for future years, crediting Chancellor Rachel Reeves's increase in employers' National Insurance Contributions for shoring up the fund that pays for it.
Redwood, who represented Wokingham for the Conservative Party from 1987 to 2024 and now sits in the House of Lords, made the argument despite having opposed Reeves's NICs rise at the time, saying it was damaging to business and jobs and helped push up unemployment while cutting vacancies and new jobs.
What the triple lock means for pensioners
The triple lock guarantees that the state pension rises each year by whichever is highest out of inflation, average earnings growth or 2.5 per cent. The full state pension currently stands at £241.30 a week and is expected to rise to around £251 a week, taking the annual total above £13,000 from next spring.
The most recent wage growth figure was 4.1 per cent, against an inflation reading of 2.6 per cent. A further earnings figure due out on Tuesday, September 15 is likely to be the one that decides the size of next year's increase.
How the National Insurance Fund works
Redwood said the scale of money now flowing into the National Insurance Fund because of the higher employer contributions means it does not need to worry about paying out state pensions in the coming years, and is instead building a large and growing cash reserve.
He said most commentators had failed to explain how National Insurance actually works. Revenue from National Insurance is not paid into the Treasury's general account to be spent on government priorities like other taxes. Around 24 per cent of the money is sent to the NHS under a formula set out in law, with the rest paid into the National Insurance Fund.
Redwood argued that referring to the payments as NICs disguises their real purpose, and that it only becomes clear they fund contributory state pensions when they are called National Insurance Contributions in full. He said the government's practice of describing the state pension as a welfare benefit muddles public understanding of what happens to the money.
A pay-as-you-go system
According to Redwood, a person's pension is an entitlement built on past contributions, and the Fund must broadly balance each year, matching money coming in against the cost of pensions paid out. He described it as a pay-as-you-go fund rather than an endowment holding individual savings, meaning workers today pay for their parents' pensions while their children will later pay for theirs.
If contributions exceed costs in a given year, the Fund adds to its reserves. If costs exceed revenue, the Treasury may have to top up the Fund with a grant from general taxation, something Redwood said last happened in 2015-16.
Surplus forecast to keep growing
The Government Actuary reports on the Fund's solvency every year. Its latest report found the Fund holds a £101billion surplus, above the minimum reserve the Actuary requires to meet future payments.
Redwood said that surplus is forecast to reach £164billion by 2031, with the Fund expected to generate an annual surplus of around £15billion in each of the next four years, a projection that assumes the triple lock continues. He said this is a direct result of Reeves's increase in contributions, and that the Actuary would probably regard a surplus of about half that level as prudent.
The contributory principle
Redwood said the contributory principle remains important, with some people topping up their contributions to secure a full pension and others needing to work enough qualifying years, all of which is set out in legislation.
He said the government could in theory change the law to draw down the growing surplus, or scrap the contributory principle altogether and turn the state pension into a welfare benefit for older people regardless of their work and payment record. No government has done this, he said, because of the popular support for a fund-based, contribution-linked system.
Redwood argued that anyone seeking to scrap the triple lock would simply increase the Fund's surplus further unless they were also willing to overhaul the wider National Insurance system, abolishing the Fund, making NICs a tax paid straight into Treasury general accounts, and legislating afresh on who qualifies for a pension, how much it would be and how it would rise. He said he doubted Andy Burnham was ready to take that step.
Redwood said he supports keeping a contributions-based pension and is glad the triple lock remains affordable even with the lower rate of National Insurance now being paid by employees.
