Triple lock policies create clear divide between parties
18 May 2017
The Conservatives Manifesto announced the triple lock protection on the state pension – guaranteeing annual increases at the higher of 2.5%, average earnings, or the consumer price index (CPI) – would be reduced to a double lock from 2020, which will use earnings and inflation only.
The manifesto said that while a decade ago “pensions were in crisis and poverty blighted the retirement of many older people” the triple lock had helped put that right but it was “now time to set pensions on an even course” by introducing the new double lock from 2020.
In contrast the Labour Party manifesto made the committment to retain the triple lock protection until at least 2025, while the Lib Dems also pledged to keep it in place but only until the end of the next Parliament in 2022.
The manifesto also said it would increase the state pension age so that it “reflects increases in life expectancy, while protecting each generation fairly”, although it did not stipulate a time frame.
Jon Greer, head of retirement policy at Old Mutual Wealth commented that the Conservatives had taken a “bold step” in committing to replace the triple lock.
However, he pointed out that while the double lock would no longer have the guarantees that the state pension would rise by 2.5%, the state pension would still rise faster than both earnings and prices in the long run, because of inflation. This was according to projections from the Office for Budget Responsibility, he said.
“If the government really want to ensure the social contract between generations remains intact, which they dedicated an entire chapter to, they will need to take a tougher stance on this political hot potato,” he added.
“The Conservatives should have heeded the recommendation of a ‘smoothed earnings link’ from the Work and Pensions Select Committee. This means growth in pensions continues, but when earnings fall behind price inflation, an above earnings increase could kick in until either earnings growth resumes or for as long as the pension remains above a previously established limit compared to average earnings. When this happens it would revert to earnings.
“This would ensure that the state pension rises in line with earnings rather than faster than earnings, but also protects pensioners when earnings fall.”
Tom Selby, senior analyst at AJ Bell, sad the triple-lock was an “odd mechanism” for increasing the state pension and “difficult to justify given the stagnation of average incomes for younger people”.
“The next Government should instead set out what it believes the state pension should be worth and articulate a plan to achieve that level. This would be simpler and clearer than the current policy, which ratchets the payment up at random based on the prevailing economic circumstances.”
Steven Cameron, pensions director at Aegon said: “Pensioners face tough measures as we face the growing costs of an ageing population and intergenerational trends which have seen pensioners incomes rise to just 7% lower than those of the working population on some measures. It’s a wake-up call that we need a new generational deal to address costs of our ageing society.
“The dropping of the state pension triple lock from 2020 will apply equally across all pensioners, but dropping the 2.5% will only lead to less generous increases in the unlikely event that both earnings and price inflation fall below this in future years. But a continued link to national average earnings does mean pensioners benefit where a stronger economy leads to greater earnings for the working population.”
David Newman, head of Pensions at Close Brothers Asset Management, pointed out that since the introduction of the triple lock seven years ago, the UK’s population of retirees has grown, which combined with increasing life expectancy, meant older people had become “a significant financial burden for the government, leading to the creation of a wealth gulf between retirees and younger generations”.
If the triple lock is scrapped, he added, “then there will be an even greater need to promote an autonomous savings culture, meaning people save earlier in their lives, taking on enough risk to enable them to meet their retirement goals on their own.
“It is crucial that those starting their savings journey understand what the right level of risk is for them early on, so that markets can do much of the heavy lifting over the next 40 years and deliver them the pension they need for the lifestyle they want to have in retirement.”
In respect of the Age at which the State Pension is paid out, Old Mutual’s Greer added: “The debate … is a question of who pays and how much. We operate under a ‘pay as you go system,’ so instead of saving for your own state pension, you fund the pensions of current pensioners. This means the more generous the terms, the greater the funding required from current workers.
“The Institute for Fiscal Studies IFS has revealed that pensioners have seen their average income grow nearly 15% since 2007/08 thanks to the triple lock. Meanwhile, young adults have only just started to recover median income levels last seen before the recession. The future affordability of the state pension will not be eased by a double lock and that fact is likely to exacerbate the growing issue of intergenerational inequality.”
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