The state pension safeguard is likley to remain in place for some time, says Jeff Salway
The cost to working-age households and future generations of retaining the safeguard is no longer acceptable, the influential Work and Pensions Select Committee has warned. It has urged politicians to seek consensus on a new basis for state pension increases.
The payments currently increase each year by the higher of 2.5 per cent, earnings or inflation, under the triple lock arrangement that took effect in 2011. The annual payment previously increased by either inflation or 2.5 per cent, whichever was higher.
The triple lock restored the link between average earnings and the basic state pension that had been removed in 1980 by Margaret Thatcher.
But keeping it in place will “worsen an economy already heavily skewed towards baby boomers and against millennials”, according to the Select Committee, which noted that children are now twice as likely as pensioners to be living in poverty.
Its report came just weeks after the Intergenerational Foundation said the cost to each worker of paying for today’s state pension had risen to £2846 over the past year. It also estimated that private firms spend £22,400 more each year on pensions for older members (typically in defined benefit schemes) than on younger members in defined contribution schemes.
The Conservatives have pledged to maintain the triple lock until the next general election. That is scheduled for 2020, but while there is speculation that the UK could go to the polls as early as next year there’s little chance of the triple lock being removed within the next four years.
After that, however, political consensus must be sought on a new basis for state pension increases, said Frank Field MP, chair of the Select Committee.
“No party has been immune from chasing the pensioner vote – but at what cost to future generations? Politicians of all stripes must accept some responsibility for these trends, and we must act together now to address them.”
So what will the triple lock be replaced with? The Select Committee proposed removing the 2.5 per cent element and instead using a benchmark based on a proportion of average earnings.
If inflation exceeds earnings growth, the value of the state pension would be protected by price indexation. That would continue even when earnings growth again exceeds inflation, until the basic state pension is back up to the benchmark.
That approach would ensure the value of the state pension would grow relative to earnings while still protecting pensioners against inflation, said the committee.
There are other options. One is to link the state pension either to inflation or to average earnings, as opposed to both.
The state pension could alternatively be based on a new dedicated “pensioner index”, according to Malcolm McLean, senior consultant at actuaries Barnett Waddingham. This would link annual increases to a level of inflation that reflects the cost of living for retired households, which typically spend more on items such as food and heating than on housing and travel.
But McLean believes the triple lock should remain in place.
“We still have one of the smallest state pensions in Europe – even the shiny new state pension at £155.65 a week is only a mere 5p above the Government’s specified minimum income level of £155.60 a week as measured by the means-tested Pension Credit – and a failure to continue to provide adequate uplifts in its value runs the risk of putting more and more pensioners into poverty in the future.”
The triple lock should be retained for another full five-year term, according to McLean, taking it to 2025. However that may amount to “kicking the can down the road” and make it even harder to scrap the triple lock in 2025, he acknowledged.
“The concept of a dedicated index for pensioners would therefore seem on balance, if it were possible, to be the best option,” said McLean.
But it would take a brave politician to spearhead a move to end the triple lock, given the value of the grey vote.
“An early political consensus is certainly desirable but is far from certain that it can be achieved.”