Andy Burnham told to freeze State Pension and stop defined benefit pensions

Andy Burnham has been urged to consider a sweeping overhaul of Britain’s pension system, including a temporary freeze on the State Pension and the gradual phase-out of defined-benefit pension schemes, as the Government prepares for a crucial Budget.

The proposals have emerged from the Institute of Economic Affairs (IEA), a free-market think tank that has published an “Alternative Budget” setting out its preferred approach to taxation, public spending and the national finances.

With Chancellor John Healey due to present his Budget on October 28, the recommendations are likely to intensify debate over how the Government should control public expenditure while protecting pensioners who rely on their retirement income to meet everyday costs.

The IEA argues that rising national debt and the budget deficit need to be brought under control through a combination of more sensible taxation and tighter spending. Among its most controversial recommendations are suspending the State Pension triple lock, freezing the basic State Pension in cash terms for a specified period and reducing the ceiling for welfare spending.

It has also suggested that the Government consider phasing out defined-benefit pensions, which promise retirement income calculated according to a formula typically linked to salary and years of service.

These are recommendations from an independent think tank, not confirmed Government policy. There is no announcement in the supplied report that Burnham intends to freeze the State Pension or abolish defined-benefit pensions in the forthcoming Budget.

Nevertheless, the proposals arrive at a time when the future of retirement provision is becoming an increasingly important issue for ministers. An ageing population, pressure on public finances and questions about whether people are saving enough for retirement have all contributed to a debate over how the pension system should be funded over the long term.

For pensioners, the immediate concern is whether future increases will keep pace with the cost of living. For workers, the issue is whether the pension arrangements available today will provide sufficient security when they eventually retire.

The Government must navigate both questions while avoiding changes that could leave vulnerable households struggling to pay for essentials.

IEA calls for State Pension freeze

Under the current triple lock, the State Pension increases each year by whichever is highest of average earnings growth, Consumer Prices Index inflation or 2.5%.

The mechanism is intended to protect pensioners against rising prices and ensure that their retirement income does not fall too far behind the earnings of the working population.

Because the highest of the three measures determines the annual increase, the triple lock can produce substantial rises when wages or inflation increase sharply. It can also mean that the State Pension rises by more than prices alone during some years.

Supporters argue that the policy offers pensioners a valuable degree of certainty after a lifetime of work and helps prevent retirement incomes from being eroded by inflation.

Critics, however, question whether the formula is affordable indefinitely, particularly as the number of people receiving the State Pension grows and the Government faces competing demands for public spending.

The IEA’s Alternative Budget proposes suspending the triple lock and freezing the basic State Pension in cash terms over the period covered by its recommendations. It also proposes freezing welfare spending in cash terms, followed by an annual reduction of 0.85% in the spending ceiling for three years.

A cash freeze means that the amount paid does not increase in pounds and pence during the period. It does not mean that the payment retains the same purchasing power.

If prices continue to rise while a pension remains unchanged, the pensioner can buy less with the same amount of money. The impact would depend on the rate of inflation, the length of the freeze and the household’s other sources of income.

John Healey is to present his Budget on October 28 (Image: Getty)

For retirees who have limited savings or depend heavily on the State Pension, that distinction could be particularly significant.

The IEA’s argument is rooted in the need to restrain public expenditure and bring the national finances under greater control. Its critics would argue that freezing pension payments could shift a substantial part of the adjustment onto older people, including those with little ability to increase their income.

The proposal therefore raises a fundamental question for Burnham’s Government: how should the state balance the need for fiscal discipline against its responsibility to protect people who depend on retirement benefits?

Triple lock changes already on the political agenda

The recommendations come after Burnham said in his conference speech that he wanted to adjust the triple lock from April 2030.

The proposal described by Work and Pensions Secretary Pat McFadden earlier this month would change the way annual increases are calculated. Under the model he outlined, the pension would rise by the highest of inflation, 2.5% or the increase required to maintain its record-high level relative to average earnings.

That would differ from the current arrangement, which uses earnings growth as one of the three measures regardless of whether it is sufficient to maintain the pension’s relative position against average pay.

McFadden described reforming the triple lock as the “right answer to a difficult question” and said changes to the existing policy were “inevitable”.

His comments suggest that the Government recognises the pressure to reconsider how the system operates over the longer term. But the proposed adjustment is not the same as adopting the IEA’s recommendation to freeze the pension in cash terms.

The distinction is important. A revised formula could continue to provide annual increases, while a cash freeze would prevent the payment from rising during the specified period.

The timing also matters. The change discussed by Burnham is associated with April 2030, whereas the IEA has put forward a separate proposal for a temporary freeze. The report does not establish that ministers intend to bring forward the proposed change or introduce a freeze in the October Budget.

Pensioners will therefore be watching for clarification about what the Government intends to do, when any changes would take effect and whether the current protection will remain in place until the proposed reform date.

For the Chancellor, the challenge is to provide a credible long-term plan without creating unnecessary uncertainty for people who have already retired or are approaching retirement.

Government insists pensioner poverty is set to fall

Despite the debate over reform, the Government has argued that its overall approach will improve the financial position of pensioners.

Speaking in the House of Commons, McFadden said pensioner poverty was forecast to fall under the Government’s plans. He also pointed to the work of the Government-backed Pensions Commission, which has been tasked with exploring ways to provide further support for lower-income pensioners.

The commission’s role is significant because the financial position of older people varies considerably. Some retirees have substantial workplace pensions, savings or other assets, while others depend largely on the State Pension and means-tested assistance.

A policy that has a limited effect on one household can have a much greater impact on another. This makes it difficult to assess pension reform solely by looking at the headline payment.

McFadden also highlighted the planned increase in the State Pension. He said the full new State Pension was rising by £575 that year and was expected to be more than £2,000 a year higher by the end of the Parliament than when Labour took office in 2024.

He added that the new State Pension was forecast to reach more than 30% of average earnings by 2029, which he described as a record level.

Those figures form part of the Government’s argument that the current approach has delivered meaningful increases for retirees. However, the value of those increases to individual pensioners also depends on inflation, housing costs, energy bills, council tax and other essential expenses.

The debate over a possible freeze is therefore about more than the amount written on a pension statement. It is about the amount of goods and services that pensioners can actually afford.

Defined-benefit pensions face a separate challenge

The IEA’s recommendations extend beyond the State Pension, raising the prospect of a major change to workplace retirement provision.

Defined-benefit pensions promise a retirement income calculated using a formula, often based on a person’s salary and length of service. The precise arrangements vary between schemes, but the central feature is that the pension is determined by the scheme’s rules rather than simply by the investment value of an individual’s pension pot.

These arrangements have historically provided an important source of retirement security, particularly for employees in parts of the public sector and workers who joined older workplace pension schemes.

The IEA argues that the Government should consider phasing out defined-benefit pensions because they can leave employers facing substantial long-term financial commitments. It suggests that moving towards individual pension pots could make future employer costs more predictable.

Under a defined-contribution arrangement, contributions are paid into an individual pension pot, which is invested. The eventual retirement income depends on factors such as the contributions made, investment performance, fees and how the accumulated funds are used at retirement.

This approach can make the cost of employer contributions easier to establish in advance. However, it also transfers more investment and retirement-income risk to the saver.

If investments perform poorly, contributions are insufficient or a person retires during unfavourable market conditions, their pension pot may not provide the income they expected. Someone with a defined-benefit pension, by contrast, generally has an entitlement determined by the scheme’s formula, subject to the scheme’s terms and financial position.

The difference is especially important for workers planning their retirement decades in advance. A guaranteed formula can offer a clearer picture of future income, while an individual pension pot requires people to consider investment risks and the uncertainty of how long their retirement savings may need to last.

A transition away from defined-benefit arrangements would therefore involve more than changing the type of pension offered to new employees. It would require careful consideration of existing promises, funding obligations and the costs of moving from one system to another.

The IEA itself acknowledges this problem in its Alternative Budget. It notes that diverting contributions from unfunded schemes into individual pension pots would leave existing pension commitments requiring replacement financing. It also says any reduction in future commitments should be weighed against transitional cash costs, referring to the Hutton report on public service pensions published in 2011.

That warning highlights a central difficulty: reducing future liabilities does not automatically remove the cost of pensions already earned or payments that are still due.

Why pension reform could prove difficult

A proposal to phase out defined-benefit pensions would raise different questions for public-sector employers, private businesses and workers.

For employers, the attraction of defined-contribution schemes can be the greater predictability of their future contributions. They can budget for an agreed level of payments without necessarily carrying the same long-term obligation to provide a pension calculated from salary and service.

For employees, however, the change could reduce certainty about the income they will receive after retirement. Their final pension would depend more heavily on how much has been contributed, how investments perform and what income can be obtained from their accumulated savings.

Public-sector pensions present additional complications because many schemes are unfunded. In such arrangements, contributions and government funding help meet pension payments as they fall due rather than being accumulated entirely in individual investment pots for each member.

Moving towards funded individual accounts would require decisions about how existing pension promises should be financed while contributions are redirected to a different system.

Without careful planning, the transition could create significant short-term financing pressures even if it reduced some future commitments. The IEA’s reference to the Hutton report recognises that the financial consequences of pension reform cannot be judged solely by the potential long-term savings.

There would also be questions about fairness between generations. Younger workers might be placed into a different pension system from older colleagues, while existing members would need clarity about whether their accrued benefits remained protected.

The source report does not indicate that the Government has accepted the IEA’s recommendation to phase out defined-benefit pensions. It is therefore important to distinguish the think tank’s proposed changes from any confirmed policy decision by Burnham or Healey.

Nevertheless, the recommendation puts the future of workplace pensions firmly into the wider discussion about the sustainability of Britain’s retirement system.

What the Budget could mean for pensioners

With the Budget scheduled for October 28, attention will turn to whether Healey announces any measures affecting pensions, welfare spending or the Government’s longer-term fiscal plans.

A freeze on the State Pension would have a different effect from an adjustment to the triple lock. Under a freeze, the cash amount would remain unchanged during the specified period, potentially reducing its purchasing power if prices rose. Under a revised annual uprating formula, payments could continue increasing, although the size of those increases would depend on the rules adopted and the economic conditions at the time.

The proposed April 2030 adjustment and the IEA’s temporary freeze should not be treated as interchangeable policies. Nor does the source material confirm that either a State Pension freeze or the phase-out of defined-benefit schemes will form part of the October Budget.

Pensioners should therefore wait for the Government’s published announcements rather than assume that the think tank’s recommendations will become law.

For people on lower incomes, it will also be important to understand how any pension changes interact with means-tested support. The State Pension is only one part of the wider retirement-income system, and eligibility for additional assistance depends on individual circumstances and the rules of each scheme.

For workers still building their retirement savings, the discussion about defined-benefit pensions is a reminder that workplace arrangements can have a substantial effect on future financial security. Anyone concerned about their pension should check the terms of their existing scheme and seek regulated financial advice where necessary before making decisions about retirement savings.

A difficult decision for Burnham

The recommendations place Burnham’s Government before a difficult choice between controlling public expenditure and maintaining the protections that many pensioners have come to expect.

The IEA believes that suspending the triple lock, freezing the basic State Pension temporarily and reducing future defined-benefit commitments could help address the pressure on the public finances. Its approach places greater emphasis on spending restraint and predictability for employers.

Opponents of such measures would point to the risks of reducing pensioners’ purchasing power and shifting more retirement risk onto individual workers. They would also question whether savings from pension reform would justify the potential impact on people who have limited opportunities to replace lost income.

Both the immediate cost and the long-term consequences matter. A policy that reduces spending in one area may create pressure elsewhere, while a policy that protects existing payments may require additional revenue or savings from other parts of the Budget.

The Government’s task is to explain how it intends to manage these trade-offs and whether its proposed reforms can protect vulnerable pensioners while keeping the public finances sustainable.

McFadden’s comments indicate that the Government is already considering changes to the triple lock in the longer term. His assurance that pensioner poverty is forecast to fall also suggests that ministers want any reform to be assessed alongside measures intended to support people on lower incomes.

The October Budget may provide further clarity on the Government’s immediate priorities, but the deeper questions about retirement provision are unlikely to disappear with a single announcement.

For pensioners, the central concern will remain whether their income can keep pace with living costs. For workers, it will be whether their savings and workplace pensions can provide a secure retirement. For the Government, it will be whether those expectations can be met without placing an unsustainable burden on future taxpayers.

The IEA has now set out its preferred direction. Whether Burnham and Healey accept, reject or modify those recommendations remains to be seen. Until the Government announces its decisions, a State Pension freeze and the phase-out of defined-benefit pensions remain proposals—not confirmed changes to Britain’s pension system.