The triple lock could become one of those very rare things in recent history with government pension policy: an enduring feature that delivers over the long term to drive better retirement outcomes without being tampered with.
Introduced by the Conservative/Liberal Democrat coalition government in 2010, you could make an argument for it being as important as auto-enrolment, which followed in 2012, at least in the sense that it protects the whole retirement population rather than only those eligible for a workplace pension.
Its critics would argue that successive increases of 10.1 per cent in April 2023 followed by the 8.5 per cent announced yesterday to follow in April 2024 are unreasonably high compared to other benefits, unaffordable relative to other spending commitments, or both.
While we do have long-term affordability challenges with the state pension, to draw comparisons between government spending priorities is a fool’s errand and risks undermining the importance of the triple lock today.
The UK has one of the lowest state pensions across the OECD. We rank 28th out of 38 for spend on old age pensions as a percentage of GDP, and when measuring pensioner poverty are placed 23rd out of 35 OECD countries measured.
What is really needed is a clear policy for our long-term state pension provision, developed with cross-party political consensus.The triple lock is serving an important role in providing meaningful increases to UK pensioners, helping protect the most vulnerable as cost of living increases soar.
Our analysis shows that because of the triple lock, the April 2024 state pension is more than 10 per cent higher than it otherwise would have been if just inflationary increases had been applied to it since 2010.
Focusing on the metric used for calculating the annual increases misses the point. Our state pension is starting from a low rate and the current policy at least goes some way to mitigate this, although not by deliberate design.
Inflation is falling and the Office for Budget Responsibility has cut its forecast for UK growth rates to 0.7 per cent in 2024 and 1.4 per cent in 2025. Future increases are likely to be lower, and when factoring in the pause in the triple lock for Covid this period undoubtedly has some lumpy data points.
If the government is looking to manage increases in a less blunt way, a fairer approach may be to adjust the earnings increase criteria to account for increases over a longer period, which would align employment and pensioner income increases more closely.
Changes to the triple lock, or the state pension, should not be made in a piecemeal way.What is really needed is a clear policy for our long-term state pension provision, developed with cross-party political consensus and a long-term commitment to its implementation.
This should use income replacement rates (pension income as a percentage of previous earnings), and be assessed alongside auto-enrolment contribution levels to deliver a reasonable pension for the average UK earner.
With this framework established, sensible policy decisions can be taken around:
- The role of personal and employer pension provision and how to increase this (such as increases to AE minimum levels and measures to encourage self employed to save more for retirement).
- A fair state pension value to protect from pensioner poverty and help support a reasonable retirement, in conjunction with personal and employer provision.
- How to manage increases to state pension going forward.
This would give clarity over the objectives our state pension and private pension provision is designed to meet, give people more certainty over their expected state pension at retirement and change the debate from the relevance of short-term state pension increases to the purpose and overall value it provides.
Now was not the time to tweak the triple lock. The increased income that it provides right now, especially to deal with the high cost of living, will have been desperately needed by pensioners, particularly those on low incomes.
Changes to the triple lock, or the state pension, should not be made in a piecemeal way.
Once the state pension is at a more meaningful level for the pensioners relying on it, the mechanism of ensuring fair but affordable increases must be addressed.
Deep-rooted reforms that consider the interaction of pension savings, tax, and other benefits including care are needed.
Paul Waters is head of DC markets at Hymans Robertson
