Connor Williams: Pension reform is necessary and inevitable

Connor Sutherland Williams is a Cardiff University alumnus with an interest in limited government and political reform.

The UK state pension was introduced after the Second World War under the Labour government led by Clement Attlee. At that time, there were vast numbers of retirees with no pension provisions who could not continue working. The solution was to fund pensions through National Insurance: current workers would actively pay for current retirees. There was no large, pooled fund invested for future payments. This pay-as-you-go system, while suitable at the time, has proven to be shortsighted and unsustainable in the modern era.

Why is the current system unsustainable? The biggest challenge to pension sustainability is the triple lock. This policy guarantees that the state pension rises each year by the highest of 2.5 per cent, inflation measured by CPI, or average wage growth. While well-intentioned, this means pension payments must increase annually regardless of the government’s fiscal position.

Currently, the UK government is running a significant deficit of around £137 billion for the 2024 to 25 fiscal year. This forces it to borrow more, which increases debt interest repayments. These repayments reduce the funds available for public services and push the government to borrow even more, creating the risk of a debt spiral. If the government cannot outgrow its deficit, it risks losing access to borrowing, which could lead to a collapse in public services and government instability.

The political reality is that pensioners vote at the highest rates of any age demographic and, understandably, in their own interests. They strongly support the triple lock and consistently oppose reductions in their pension income. As a result, it is extremely difficult for any government to win popular backing for pension reform. This is what renders the issue politically impossible to solve, as the pensioner vote is essential to winning elections.

A shrinking working population reduces the inflow of National Insurance contributions, making it increasingly difficult to support the growing number of pensioners. Higher NI rates are then imposed on the remaining workforce, which encourages emigration to lower tax countries such as Australia, Dubai, or Portugal. The resulting population loss forces NI rates higher still, compounding the problem.

This problem is enormous, so the solution must be equally significant.

The pension system must transition from the current pay-as-you-go model to a pay-into-the-pot model, where contributions are invested and allowed to grow over time. This would fund future pensions more sustainably. However, the shift cannot happen overnight, because existing pensioners rely on payments drawn from today’s workforce.

A phased approach is necessary. Individuals under the age of 35 could move to a hybrid model. Under this approach, they would continue supporting current retirees through National Insurance while also contributing to a collective investment pot for their own retirement. When they reach pension age, they would draw from this pot rather than from the working-age population.

Alongside this, pensions would be means-tested. If a pensioner’s income from other sources, such as rental property, stocks, or private pensions, exceeds the average wage, they would become ineligible for the state pension under this system.

To control the cost of maintaining the pay-as-you-go system during the transition, the triple lock would be scrapped. State pensions would instead rise annually in line with CPI inflation only. This reform, if implemented in 2011, would have saved £10 billion a year by 2023. These savings could be invested into the new pension pot, gradually reducing reliance on tax-funded state pensions. In theory, this would reduce costs and make the system more sustainable over time.

In order to rein in public spending and make pensions sustainable, there must be a shift away from a model that relies on a constantly growing base of workers. The current system places an unsustainable burden on the working-age population and is fundamentally misaligned with the UK’s demographic and fiscal realities.

Pension reform is not just necessary. It is inevitable.

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