As the 2017 General Election campaign begins to gather momentum, there has been a lot of speculation about the future of the pension ‘triple lock’. Below we explain everything you need to know about the triple lock, and why it is important…
Recent reports have suggested that the Conservative party are considering replacing the pension ‘triple lock’ with a less generous ‘double lock’ commitment, in a bid to raise more cash to spend on social care.
What is the triple lock?
The pension triple lock mechanism was introduced by the coalition government back in 2011, and provides a guarantee that the amount of the basic state pension will rise either with the rate of inflation, the growth of average earnings or by 2.5% – whichever is higher.
Prior to the introduction of the triple lock, the state pension simply increased with the rate of inflation – measured by the retail prices index (RPI) – which was regularly lower than the increase in earnings and 2.5%.
What effect has the triple lock had on pensioner incomes?
As the growth in earnings has been very weak in recent years, the triple lock has provided a boost to the state pension in relation to inflation and average earnings. In a recent assessment, the Institute for Fiscal Studies (IFS) reported:
“Between April 2010 and April 2016 the value of the state pension has been increased by 22.2%, compared to growth in earnings of 7.6% and growth in prices of 12.3% over the same period.”
Which basically means pensioners have seen their income from the basic state pension rise at almost double the pace of the average UK worker.
How much does the triple lock cost the government?
The government have estimated that this dramatic rise has led to the value of the pension being at its highest level since the late 80’s, with the increased benefit paid to pensioners costing an extra £6bn per year over 2015-16.
Why is the triple lock being reviewed?
Before the last election in 2015, the Conservative party (then still in a coalition with the Lib Dems) pledged in their manifesto to continue the pension triple lock mechanism until 2020. However, it is becoming increasingly apparent that the current Prime Minister and Chancellor – Theresa May and Phillip Hammond – are being constrained by the promises made in the last manifesto, and the triple lock is something they think should be revised in order to free up more funds.
What is the pension ‘double lock’ and how will it work?
The ‘double lock’ would see the government remove the 2.5% guarantee, as this has consistently been the highest of the three ‘triple lock’ components. However, forecasting rises both in inflation and earnings is a notoriously tricky affair so the amount it will save the government is just a prediction.
The Office for Budget Responsibility has predicted that ditching the pension triple lock will mean spending can increase by 1.1% of national income between the years 2020-21 to 2060-61 – which is the equivalent of £21bn in today’s money.
Will the government raise the state pension age?
As it stands people who were born after March 1961 will wait until they are age 67 before qualifying for the state pension, and people born after March 1977 will qualify when they reach 68. However, former CBI boss John Cridland recently published a government-commissioned report which argued that people need to start working longer to account for increased life expectancy – something which the government is currently considering.