Breaking the Pensions Triple Lock. Courageous or Controversial (or both?)

David Bogle

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For those outside the world of pensions, triple lock is perhaps a term from the sedate world of canal cruising holidays. However for pensioners of the future it is a term they should acquaint themselves with and the impact it has on their future prosperity.

This fairly new chestnut of the pension triple lock raised its head recently. Baroness Altmann, former Pensions Minister in the Cameron Government, has voiced the opinion that the triple lock would not be affordable after 2020. Baroness Altmann has been vocal on pension policy in the past few weeks, (well since she left Government), with her earlier comments on Tata Steel and pension provision. Yet what does the pension triple lock mean and why should our future pensioners care so much?

First, a quick refresher on what the triple lock actually is. Since its introduction in 2010, the Basic State Pension (which for 2016/17 is £119.30 per week) has increased each April by the greater of:

  • Inflation
  • Average Earnings
  • 2.5%

The three things combine to provide a triple lock (see what they did there?)

All very well and good you might say. You may also think it’s a very noble undertaking by the Government – what could possibly be wrong with something like that? Well as with everything in life, it costs money. Total spending on pensions has increased by a quarter since 2010-11.

What Baroness Altmann is proposing is that the triple lock should end in 2020, and instead be replaced by a double lock, with the 2.5% guarantee falling away. This actually wouldn’t have had any effect in April this year, as earnings (measured by the annual increase in pay across the economy from May to July one year compared with the next) increased by 2.9%. This was compared to inflation last year of -0.1%. However, given that in 2014, inflation and earnings were much lower than 2.5%, the 2.5% guarantee had a considerable effect.

What many experts fear is that if the UK was to go into a period of prolonged low, or even negative, inflation and wage inflation, the situation would arise where other pensions (whether in the public or private sector) would only marginally increase (if at all), and the same would apply to the average person’s wages. However, at the same time pensioners would see a 2.5% increase to their income. If you asked the average worker if they would take a 2.5% annual pay rise, I guess many would bite their respective employer’s hands off.  Finance directors might be less sanguine about this.  You have to think moving to the double lock would be a deeply unpopular move with pensioners.

However, a report last year from the Government Actuary’s Department estimated that the triple lock already cost in the region of £6bn a year and that these costs could spiral going forward. After all, people are living longer and longer – as my previous blogs on mortality describe in detail.  So you can see the Government’s dilemma: How to save money at the expense of all of those lovely votes? There is no consensus on this dilemma. Baroness Altmann’s predecessor, Steve Webb stated that the pensions triple lock should remain, as it was an important way of building up a state pension that been neglected in his opinion. However, other prominent players in the pensions world, such as the Institute for Fiscal Studies (IFS), have said the triple lock is simply unaffordable.

What then could happen next? Well, what we do know is that the Government has promised to maintain the triple lock until 2020. So it should be in place to then at least. After that? Who knows! After 2020, whoever the Government may be, could keep the triple lock, remove it entirely, go with the proposed double lock, or they could even amend the triple lock by reducing the 2.5% guarantee.

Whatever happens, it will be interesting to see what decisions are made – and a decision will have to be made on this one! Pensioners make up an ever increasing proportion of the electorate, so any reduction or removal in guarantees would be politically unpopular. It may be, in the words of that Whitehall supremo, Sir Humphrey Appleby, a controversial or even a courageous decision. I’ll leave you with this snippet from Yes Minister………

Sir Humphrey: If you want to be really sure that the Minister doesn’t accept it, you must say the decision is “courageous”.

Bernard: And that’s worse than “controversial”?

Sir Humphrey: Oh, yes! “Controversial” only means “this will lose you votes”. “Courageous” means “this will lose you the election”!