State PensionSep 9 2021

Why we need the triple lock back in 2023

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Why we need the triple lock back in 2023
Photo by Javier Gonzalez from Pexels

When setting the rate of the state pension there are several competing approaches. 

One argument is that annual increases should simply reflect what has happened to prices in the shops over the previous year. If the pension keeps pace with prices, then the living standard of the retired population will be maintained. 

A second argument is that if people in work are enjoying pay increases then pensioners should share in this prosperity. Given that pensions exist to support people when they are no longer earning, a link between the level of pensions and the level of earnings makes sense.

The dilemma faced by the current government was what to do when the earnings data goes haywire

But sometimes neither earnings nor prices rise very much and simply linking the pension to either measure can result in an increase measured in pennies rather than pounds. As Gordon Brown famously discovered, paying an increase of 75p just before a general election was not well received and he was forced to pay a £5 increase the year after to try to undo the political damage.

The coalition introduced the triple lock

The combination of these three arguments was what gave rise to the triple lock, introduced by the coalition government after the 2010 general election. Under this policy, the basic state pension (and now new state pension) is increased each year in line with the highest of the growth in prices, earnings or a floor of 2.5 per cent. Interestingly, in the first nine years of operation of the policy each of these three elements was used three times.

The dilemma faced by the current government was what to do when the earnings data goes haywire. The triple lock was obviously designed for more normal times, and no one foresaw the gyrations in earnings levels that we have seen as the economy has moved into and out of a global pandemic.  

Average weekly earnings rose by 8.8 per cent in the latest three-month period (April to June) against the same quarter last year, according to the Office for National Statistics. But the ONS says this figure is not a fair reflection of the pay rises that people in work are receiving. This is for two reasons:  

  • The furlough scheme meant some people were on reduced wages for a limited period. Now that they are back on full wages it looks as though they have had a big pay rise when in reality their pay is probably only restored to where it was a couple of years ago.

Given that pensions were not cut when wages fell, it is hard to see why they should surge now wages are recovering.

  • The mix of people in the workforce has changed. In terms of job losses, the pandemic has disproportionately affected those on lower wages. As these workers drop out of the figures altogether, the average wage goes up.

But this is simply because there are fewer lower paid people and not because those still in work have had big pay increases.  

For both of these reasons, the 8.8 per cent figure is an artificially high measure of earnings growth and would have been very hard to justify as the basis for the April 2022 pension rise.

Two options

The government had two main options for April 2022. One was to look for an adjusted earnings figure, perhaps looking at underlying earnings growth, to strip out the pandemic effect. The other was simply to ignore the distorted earnings figure for one year and to pay the higher of prices or 2.5 per cent.

It opted for the latter and so the state pension rise in April 2022 is likely to be whatever the rate of CPI inflation turns out to be in the year to September 2021 – probably in the range of 3 to 3.5 per cent.

What was much less certain was whether the break in the triple lock would be a one-off or a permanent measure. There can be little doubt that almost since the triple lock was first introduced a decade ago the Treasury has wanted to get rid of it. And I have no doubt that there will have been pressure from the Treasury to use the opportunity presented by the pandemic to kill it off once and for all.

The triple lock is set to pause for one year

It is therefore something of a relief, at least for those of us who believe that the state pension is still too low, that the government has made it clear that the triple lock is being paused for one year only and will then be reinstated.

There are those who feel that pensioners have been the winners of life’s lottery in recent years, particularly the recently retired, who may have benefited from rapid house price inflation, free university education and possibly being the last generation to enjoy gold-plated private sector defined benefit pensions.  

However, pension policy is not just about those who have already retired, it is about those who have yet to retire. Many of those retiring in the coming decades will have far less in the way of final salary pension provision than previous generations, while the impact of auto-enrolment in building up defined contribution pension pots will take a long time to be felt. 

State pension crucial

For this group, and for women in particular who are even less likely to have a large final salary pension, the state pension is absolutely crucial.

It is easy to forget that the triple lock was introduced after a 30-year period when the basic pension was generally pegged only to price inflation. As a result, the real value of the pension had shrunk steadily as a share of the national average wage and had become one of the lowest in the developed world.

Although 10 years of the triple lock has helped to stabilise the situation there is still a long way to go. You cannot undo 30 years of damage in 10 years.

For that reason, I am pleased that the triple lock seems set to be with us for some years to come, despite the one-year suspension of the policy announced this week.

Steve Webb is a former pensions minister (2010-15) and a partner at LCP