You know the state pension triple lock is in trouble when the minister drafted in to oversee pensions policy has previously labelled it ‘silly’.
Sure, the newly appointed pensions minister Torsten Bell made the comment five years ago and with a different hat on, as Jeff Prestridge explains opposite. But we’ve yet to hear any reassurance that Bell’s views have changed.
Comments from Tory leader Kemi Badenoch last week made the outlook for the triple lock even gloomier. She said the Conservatives would look at means-testing the system. Such a move would likely result in worse-off pensioners receiving the full state pension while those who had built up their own nest eggs would get less.
So, what is the outlook for the state pension triple lock? Would either party really dare to ditch or water down a well-loved policy that has transformed pensioners’ living standards since its introduction in 2010? And what could it be replaced with? Wealth & Personal Finance investigates.
What exactly is the triple lock?
The state pension triple lock pledges that annual payments to pensioners will rise by the highest of inflation, average wage growth or 2.5 per cent. This April the new full state pension will increase by 4.1 per cent or £472 a year, which is the figure for average wage growth last year (as measured between May and July year-on-year). That is because wage growth last year surpassed both inflation at 1.7 per cent and 2.5 per cent.
How likely is a change to the triple lock?
Not very likely – at least within the next few years – because Labour’s election manifesto promised that the party would retain it. But you’d be forgiven for being sceptical that this is a watertight vow. The manifesto also promised no increase in national insurance – and the first Budget included an increase in national insurance for employers.
Waspi women also learned the hard way last month that government promises can be rowed back on when it feels that budgets are pinched. When in opposition, numerous Labour ministers supported calls to compensate women born in the 1950s who were not aware of changes to the state pension age. Now in power, the Labour Government said it would not grant these women compensation because it claims it would be unaffordable.
Any changes to the triple lock would be deeply unpopular – especially among older generations. But it is not hard to argue that maintaining it is unaffordable. The Government may also be emboldened by Ms Badenoch’s suggestions that she might support changes to the state pension as, in theory, it could receive less political opposition than would have from her predecessors, who all pledged to leave it unchanged.
The newly appointed pensions minister Torsten Bell branded the state pension triple lock ‘silly’ five years ago
Even if the triple lock survives the next few years, its days may be numbered in the long term. That is because the cost of maintaining it is increasing rapidly due to above-inflation rises and a growing pensioner population.
It cost £124 billion in the previous tax year, and is set to rise to £169 billion by 2029-30. The state pension will make up the equivalent of 6.2 per cent of GDP by then – more than the combined day-to-day budgets of the Department for Education, Home Office and Ministry of Defence.
So how could it change in the future?
A government looking to cut the cost of the state pension has several options. First of all, it could downgrade the triple to a double lock.
That would mean that the state pension would rise by inflation or wage growth, but the 2.5 per cent element would be ditched. This would eliminate the possibility that pensioners would see their payments rise faster than the income of workers and above price rises.
Secondly, it could opt for a ‘smoothing’ option advocated by pension firm Aegon. Pensioners would receive an inflation increase as a minimum.
They would also get an additional uplift if wage growth had been higher than inflation on average over the previous three years.
Steven Cameron, director of pensions at Aegon, says: ‘This avoids widely fluctuating outcomes at times when both inflation and earnings growth are unpredictable, smoothing things out but ensuring pensioners still share in sustained increases in the nation’s wealth.’
The Government could downgrade the triple lock to a double lock by knocking the 2.5 per cent element off
He adds: ‘If the triple lock is left as is, over time, state pensioners will get higher increases than average wage growth. That lacks intergenerational fairness and it’s not sustainable.’
A third option to increase the affordability of the state pension is the one that Badenoch brought up: means-testing.
At the moment, the amount of the new state pension you receive is unaffected by what other income you receive. It doesn’t matter if you don’t have a penny to your name or you’re a millionaire: if you have made at least 35 years of National Insurance contributions you receive the same monthly amount.
A means-tested system would involve looking at what other income – and potentially what other assets – you have to help determine how much state pension you receive. Such a model is used in Australia.
It wouldn’t be the first time that means testing was applied to pensioner benefits.
After all, one of the first moves by Chancellor of the Exchequer Rachel Reeves was to means-test the winter fuel allowance.
A fourth option would be to increase the state pension age. Mike Ambery, retirement savings director at pension firm Standard Life, says that this option would entail ‘raising the state pension age further and more quickly than currently planned. It is currently set to increase to 67 by 2028 and 68 by 2046.’
Former pensions minister Ros Altmann, a long-time campaigner for older people’s rights, has argued that such a move would plunge more people into poverty in later life.
She says it would skew state pension spending towards affluent older people who tend to live longer, and penalise those who are in poorer health.
Reform versus stability
Most pension experts agree that some kind of state pension reform is necessary. However, they warn that the spectre of change undermines confidence in it.
Helen Morrissey, head of retirement analysis at investment platform Hargreaves Lansdown, says: ‘Constant rumours threaten to undermine people’s confidence in the system and there’s a risk that this could put them off doing things that could boost their retirement resilience such as saving into a pension. ’
Let’s hope Mr Bell puts his cards on the table soon and reveals whether he still advocates a reform of the triple lock – or if its future is secure under his watch.
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