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What is the state pension triple lock and why is it under attack?

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Written by: Paloma Kubiak
07/11/2016
An influential group of MPs has called for the state pension triple lock to be scrapped, claiming it will worsen an economy already heavily skewed towards baby boomers and against millennials.

The Work and Pensions Committee called for the ‘unfair and unsustainable’ triple lock to be tossed to one side and instead said all political parties should seek a consensus on a new earnings link for the state pension before the next general election.

What is the triple lock?

Since 2010, the state pension has risen annually by whichever is highest out of inflation, earnings growth or 2.5%.

The triple lock guarantee applies to the old state pension (currently £119.30 a week) and the new flat rate state pension, which was introduced in April 2016 (currently £155.65 a week).

The government has said payouts are guaranteed to grow by at least 2.5% until 2020.

People who receive the additional state pension (an extra amount of money on top of the basic state pension) are not protected by the safeguard. Their pension increases in line with inflation. And for those who receive pension credit, the amount they get increases by earnings growth.

Should the triple lock be scrapped?

The Work and Pensions Committee said retaining the triple lock would lead to an unsustainable higher expenditure.

With the increase in the state pension age, younger generations and worse off socio-economic groups with lower life expectancies in retirement would be disproportionately affected.

The MPs listed the following reasons why the triple lock should be abandoned:

  • The millennial generation, born between 1981 and 2000, faces being the first in modern times to be financially worse off than its predecessors.
  • As the taxes of working people support record numbers of the retired, the ageing population places strain on those in work.
  • After housing costs average pensioner household incomes now exceed those of working-age.
  • Improvements in retirement incomes have not been matched elsewhere: children are now twice as likely as pensioners to be living in poverty.
  • Many young people are priced out of homeownership and don’t have access to generous occupational pensions so they are “locked out of building wealth”.

The Committee also said pensioners have been protected from public spending cuts that have largely been felt by younger groups.

In August, former pensions minister Ros Altmann called for the triple lock to become a ‘double lock’ by scrapping the minimum 2.5% element, claiming it was too costly.

MPs’ alternative to the triple lock

The MPs propose that state pensions should be a fixed proportion of average earnings, doing away with the 2.5% element of the triple lock.

So if average earnings go up for the general population, pensioners would see their state pensions go up by the same amount. As an additional protection, if there was a period where price inflation was rising faster than earnings, state pensions would increase by the higher inflation figure.

But unlike a simple ‘double lock’ which would see them benefiting year-on-year from the higher of earnings or price inflation (whereas the working age population would only get earnings growth), under these proposals, once earnings inflation was once again above price inflation, pensioners would get the lower price inflation until their state pension returned to the fixed proportion or earnings. This would allow for a “smoothed earnings link for the state pension”.

Steven Cameron, pensions director at Aegon, explained that if in one year price inflation was above earnings inflation (e.g 5% inflation and 4% average earnings), then the state pension would go up with price inflation. But if in the next year earnings inflation exceeded price inflation (e.g 4% average earnings and 3% inflation), pensioners would not automatically get the increase of the higher average earnings figure. Instead they could get closer to the 3% inflation figure to “smooth” them back to the agreed percentage of average earnings across working population. Over the two years, they’d receive 5% plus 3% (a total of 8%), bringing them back into line with the 4% and 4% (a total of 8%) received by workers.

The Committee said this approach would be fiscally sustainable, “unlike a simple double lock, which would mean the value of the state pension continuing to grow relative to the rewards of work, especially during times of economic difficulty”. But it would also support pensioners who would benefit from growth and get protection against high inflation.

Frank Field MP, chair of the Committee, said: “The welfare state is underpinned by an implicit intergenerational contract. Each generation is supported in retirement by their in-work successors. But a combination of factors has sent the balance out of kilter. It is now the working young and their children who face the daunting challenge of getting on in an economy skewed against them.”

Pensioners back into poverty

Cameron said the government will need to review the future of the triple lock beyond the next General Election to deliver fair policies between generations.

He said: “The government must not set long term pension policy on the basis of those currently in retirement as those retiring in future are much less likely to match the incomes of current pensioners.  The state pension remains the bedrock of many people’s income in retirement and pensioners must be given some stability over its future level. We believe any government should commit to state pension increases for its five-year period in power with intentions set out in pre-election manifestos.”

Tom McPhail, head of retirement policy at Hargreaves Lansdown, said the triple lock has brought pensioner incomes in line with the rest of the population and any changes in the state pension could push pensioners back into poverty.

“The triple lock has served an important function in bringing pensioner incomes back into line with the rest of the population. It is also important to recognise that pensioner incomes will change again in the future, we are about to hit ‘peak DB’ after which successive pensioners will be increasingly reliant on the state pension and on defined contribution arrangements. Any measure to curb either of these in the next few years could rapidly push more pensioners back into poverty.”

Caroline Abrahams, Age UK charity director, said in the late 1990s, nearly 30% of pensioners lived in poverty and today, the figure is closer to 14% or 1.6 million which shows a “major achievement in public policy”.

“But this still means one in seven pensioners are living in poverty and this group disproportionately includes women, people from black and minority ethnic backgrounds and single pensioners. We would be very concerned by any policy that reversed this trend. The triple lock performs a simple function of making sure that pensioners’ incomes are maintained, giving some financial security in an uncertain world,” she said.

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