How Labour can unpick the triple lock

But there is an original way out. Britain should create a national investment superfund, the British Pension Plan (BPP), whose investments over the next two generations would grow so large that by the end of this century it would pay every British retiree their pension guaranteed in real terms, so creating vital public financial headroom.

The taxpayer would be free of a bill that already this year will top £138bn and which is set to increase by half in real terms within 50 years. An ageing society and the apparently politically irreversible commitment to the triple lock are wreaking their fiscal consequences.

The triple lock is the promise upheld by every political party (bar Reform) to increase the state pension annually by whatever metric offers the highest percentage – growth in real wages, inflation or 2.5% – introduced by the coalition government to address widespread pension poverty in 2010. As a result, the state pension has climbed to the highest in relation to average earnings since 1968 – but it needs to be that high. One in eight pensioners who have no other savings rely on it completely, a number which will proportionally double in the next decade as yet more pensioners with no savings join their ranks.

Means-testing seems one, if unpalatable, solution – except that private pensions are peaking in value too, given the paltry levels of contribution rates. If too little is paid in, too little can be paid out. But Britain is not so rich that it can stick with the triple lock commitment together with all its other commitments on spending and tax. Something has to give, which is why the Pension Commission has been established to come up with answers.

The BPP is the bold solution. A typical pension fund invested in government and company debt, publicly quoted shares and assets in the private markets achieves 7% returns on average: as a consequence, every £100 invested doubles in value every 10 years, doubling again every subsequent decade. If Britain could find £100bn, give it to a constitutionally independent management board, as the Canadians have done with their state pension plan, to run the portfolio on strictly commercial principles, it would have laid the foundations of such a fiscallylife-saving fund.

The bond markets would relish the prospect. They know that, as matters stand, Britain confronts a pension funding crisis. Today there are £5tn of unfunded pension liabilities. Now there would be a prospective solution. In addition, this growing superfund would strategically invest in Britain, a vital and increasingly important purchaser of UK government bonds and British shares alike. It would offer, as argued by Sir Nicholas Lyons, former mayor of the City of London and a powerful advocate of the BPP concept, an underpin to British asset prices. Given the political deadlock in the US and France over their budgetary challenges, suddenly international investors would have an incentive to buy British.

It would be win-win. Britain has new fiscal rules that declare that what should be “scored” in our public accounts is not raw, gross public debt but rather net debt after being offset by public assets. This definition – public sector net financial liabilities (PSNFL) – happily allows the government to borrow £100bn and by immediately investing the proceeds to create compensating assets to leave no change in the PSNFL. As the assets grow, the PSNFL will shrink and the original loan, say after 20 years, can be completely repaid.

It is not too good to be true: it is a realisable and coherent policy. The leading American economist, Prof Martin Feldstein, established the theorem that a state-funded pension works as long as expected investment returns will exceed the growth in real wages, that economic growth continues and that forgoing the rewards of current public spending makes economic sense in terms of the greater future prize of a funded state pension.

Each condition is met, but only as long as the interest on the £100bn debt – about £5bn a year – can be successfully serviced until the debt is repaid. This opens the possibility of an adult conversation with the electorate. If the triple lock was dropped to be replaced by a guarantee to maintain the pension in real terms, that would offer a part contribution, perhaps supplemented by a time-limited hike in national insurance contribution rates for employees. This can be done.

Rachel Reeves’s November budget promises to be an exercise in big tax increases leavened by the sweetener of abolishing the two-child cap on benefits. It could be very different. Even tax raising can be designed to be pro-growth – for example, making tax reliefs on pensions, corporation tax and R&D contingent on increased investment in the UK. If not, the relief is annulled.

But what would entrench the budget’s pro-growth credentials in a tight fiscal corner would be to take the first decisive steps to create a fully funded state pension, so that every child born from today can expect a decent pension as a right.

Labour created the NHS in the tough conditions of the late 1940s. It now can and should be the party that creates a fully funded universal state pension as the cornerstone of both a new social settlement and as a mechanism to invest in British growth. In war, attack is the best defence. Similarly in economics. Let’s attack.

Photograph by Mint Images/Getty Images