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Article | Pensions Briefing

Election 2019: 10 Triple Lock pension increases and counting

 

Retirement|Pension Board and Trustee Consulting|Pensions Corporate Consulting
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November 21, 2019

With politicians recommitting to the Triple Lock for another five years, what effect has it had so far and what is it supposed to achieve?

Just before Parliament dissolved ahead of the 12 December election, the Government confirmed that the full weekly Basic State Pension will rise from £129.20 to £134.25 in April 2020. The New State Pension (for people reaching State Pension Age from 6 April 2016) will rise from £168.60 to £175.20.

Despite its portrayal as an “end of austerity” announcement, this 3.9% increase is the minimum uprating due under legislation (an increase in line with average earnings growth), as conventionally applied. It is also the increase due under the Government’s Triple Lock, which sees these benefits rise in line with earnings growth, inflation (RPI in the first year, CPI thereafter) or 2.5% – whichever is highest.

For the Basic State Pension, April’s increase will be the tenth under the Triple Lock. What difference the Triple Lock has made depends on what you think would have happened without it. The table shows what the 2020-21 Basic State Pension would have been under various alternative uprating policies, had these been applied since 2010. It takes no account of the reduction in additional state pension payments caused by switching indexation from RPI to the usually lower CPI, which will be specific to the individual’s circumstances.

Full weekly Basic State Pension 2020-21, under various uprating policies since 2010

Actual - Triple Lock Cash terms freeze Earnings growth CPI inflation RPI inflation RPI inflation or 2.5%
2020-21 £134.25 £97.65 £120.80 £121.95 £132.05 £135.30

While the Government sometimes highlights the full £36.60/week cash terms increase, it seems inconceivable that any administration would have changed the law to allow the Basic State Pension’s purchasing power to be eroded by a decade’s worth of inflation while the nominal value was frozen.

A better comparison would be with the increases due under the earnings link required by law – in which case, 10 years of applying the Triple Lock has added £13.45 to the weekly level of the full Basic State Pension in 2020-21.

For 30 years prior to 2010, legislation had required the Basic State Pension to rise at least in line with prices, which the Government used the RPI to measure. Following negative reaction to its 75p/week increase in 2000 (reflecting low inflation at that time), the then Labour Government at first granted some ad hoc increases, before settling on a policy that the Basic State Pension would in future rise by at least 2.5% each year. Continuing RPI uprating with a 2.5% underpin would have delivered a fractionally higher 2020-21 Basic State Pension than the Triple Lock has done. However, this is arguably not a fair comparison. First, methodological changes in 2010 mean that, for a given set of price changes, RPI inflation will now appear higher than it used to. Second, Labour’s 2010 manifesto said the earnings link, which they had legislated to introduce in future, would be adopted from 2012 and did not commit to any underpins.

We estimate that spending on State Pensions, net of associated tax revenues, will be a little under £6bn higher next year than if the Basic State Pension had risen with earnings since 2010 and the New State Pension since its introduction in 2016. Part of this cost may be offset by lower spending on means-tested benefits.

With polling day in 2019’s “cold snap election” getting closer, we can expect to see politicians setting out how they want State Pensions to increase over the next five years. Based on past statements and press reports, the likelihood is that all the main parties will recommit to the Triple Lock. The Labour and Liberal Democrat manifestos have already done so (at least for the Basic State Pension, in the latter case).

One thing that makes it especially tempting for parties to do this is that the short-term cost of maintaining the Triple Lock, relative to just implementing the statutory earnings link, is projected to be zero. That’s because the Office for Budget Responsibility’s Spring 2019 projections assume that earnings will be the dominant component of the Triple Lock throughout the forecast period (which covers the next four upratings). However, as well as being the best estimate cost, zero is also the bottom of a range of possible short-term costs – there will be a cost if and when earnings growth falls below inflation or 2.5%. The greater the volatility in earnings, especially if the troughs are out of sync with inflation, the higher the cost of the Triple Lock. In the long term, the OBR estimates that State Pension spending would be 1% of GDP higher in 2067-68 if the Triple Lock were maintained until then than if it were abandoned in favour of an earnings link.

While the Triple Lock is presented as a policy for today’s pensioners, the benefits of compounding mean that it should in theory make most difference to the pensions of future retirees. However, younger people might think there is little prospect of them getting to retirement without further big changes to State Pensions and that higher spending today might increase the prospects of future cut backs.

Politicians committing to the Triple Lock seldom spell out what they want it to achieve. If the aim were to raise State Pensions relative to earnings over time, it might make more sense to say by how much and over what period, rather than outsource this job to the unpredictable volatility of price and wage inflation. The introduction with cross-party support of the New State Pension – which leads to lower State Pensions for young people than the two-tier system it replaced – might also indicate that this is not the goal.

Apart from the difficulty of taking something away once it has been given, the Triple Lock’s appeal might be that Governments can be criticised if State Pensions fall relative to earnings over the long term or if their purchasing power declines from one year to the next – or, much less rationally, if the cash increase is low because prices and earnings are themselves rising slowly. The Triple Lock protects prospective governments from all three of these potential hazards.

As we said during the 2017 campaign, it is possible to envisage a reformed Triple Lock that had all of these political attractions but which was also cheaper: a promise that pensions would each year rise at least in line with prices and by at least a certain cash amount, and that they would always be as high as if they had increased with earnings from today. However, any politicians contemplating this or any other alternative would be likely to want to do much more pitch-rolling than is possible in an election campaign.

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