The state pension triple lock is both affordable and well secured for future years, says former MP JOHN REDWOOD - here's how...

John Redwood was MP for Wokingham from 1987-2024 representing the Conservative Party and is now a member of the House of Lords. 

The triple lock pledge means state pension increases every year by the highest of inflation, average earnings growth or 2.5 per cent.

The headline full state pension is currently £241.30 a week and is expected to rise to around £251 a week and top £13,000 annually from next spring.

That's because the latest wage growth figure was 4.1 per cent, but the most recent inflation figure was 2.6 per cent – and the earnings figure due out on Tuesday, September 15 is likely to decide the matter

I have some rare good news on government finances. The triple lock on the state pension is both affordable and well secured for future years.

The Rachel Reeves decision to impose a rise in employers' National Insurance contributions (NICs) ensured that.

I and many others opposed the rise because it was deeply damaging to business and to jobs. It helped push up unemployment and cut vacancies and new jobs.

It also meant that such large sums of money were put into the National Insurance Fund that the fund does not need to worry about being able to pay out state retirement pensions in the next few years. 

Lock and key: The triple lock has been a hot political potato for years

It does mean that Rachel Reeves's decision leaves the National Insurance Fund not only able to pay the pensions with the annual increases, but also gives the Fund a large and growing cash reserve.

Most commentators failed to explain how NICs work and what they are for.

The revenues from National Insurance are not paid into the Treasury general account to spend on government priorities like other taxes.

Around 24 per cent of the money is sent to the NHS under a formula laid down in law providing for varying percentages of the different types of NI payment to be used for health.

The rest of the money is paid into the National Insurance Fund. So many call the tax NICs, disguising its purpose.

It is only when you call them NICs that it becomes clear they are the way of paying for contributory state pensions. 

The Government calls the state pension a welfare benefit. This muddles people over what happens to the money.

The National Insurance Fund receives the contributions and pays out contribution based benefits, now almost entirely the state retirement pension.

John Redwood: I support keeping a contributions based pension and am glad the triple lock is affordable even at a lower rate of NI charge

A person's pension is an entitlement based on past contributions. The NI fund has to balance each year, largely matching the money in with the costs of the pensions paid.

It is a fund, but not an endowment fund to keep your individual savings for you. It is a pay as you go fund. 

You contribute when working to pay your parents' pensions, and your children will pay when working to pay your pension.

If the contributions exceed the costs in any year the Fund adds to its reserves. If the costs exceed the revenues the Treasury may have to top the Fund up with a grant from general taxation. 

This last happened in 2015-16.

The Government Actuary reports on the Fund every year and assesses its solvency. 

The latest Report said that the Fund holds a £101billion surplus, more than the minimum the Actuary requires as a reserve to meet future payments.

This surplus is forecast to reach £164billion by 2031, as the Fund should generate an annual surplus of around £15billion in each of the next four years. 

This is of course the direct result of the Reeves hike in contributions.

It assumes the continuation of the triple lock upgrades. The Actuary would probably accept a surplus half that level as prudent.

The contributory principle is an important one, with people sometimes topping up their contributions to obtain a full pension, and having to work enough years to qualify. All this is set out in legislation.

The Government could seek to change the law to raid the Fund and reduce the growing surplus. 

It could pass a law ending the contributory principle and turning pensions into a welfare benefit for the elderly regardless of their work and payment record.

No government has done so, understanding the popular support for a Fund and a payment based system for most people's state pension.

Those who want to end the triple lock would simply increase the surplus in the Fund unless they were prepared to change the general National Insurance system and law.

They would need to abolish the Fund and make NICs a tax like any others paid into the Treasury general accounts. 

They would have to decide the basis for future payments of pensions.

The law would need to say who would be entitled, how much the pension would be and by how much it would be uprated.

I doubt somehow Mr Burnham is ready to do this.

I support keeping a contributions-based pension and am glad the triple lock is affordable even at a lower rate of NI charge.

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