How quickly the triple lock could end – and its possible replacement

The future of the triple lock has been thrown into question after reports that Andy Burnham is being told to scrap it to fund his social care plans. MPs have urged the Prime Minister to cut spending on pensioners to fund his proposal for an NHS-style social care system – making it free at the point of use. The triple lock, which was introduced in 2011, ensures the state pension increases annually by the highest of either inflation, average earnings growth, or 2.5 per cent. Shorts Average earnings in May to July this year were 3.9 per cent – meaning the state pension is likely to increase in line with this measure next April. If so, the full new state pension would rise from the current £241.30 to £250.70 per week. The full basic state pension would go up from £184.90 to £192.10 per week. High inflation in recent years has seen the cost of state pensions balloon to about £146bn a year, equivalent to 5 per cent of GDP and more than double the entire defence budget. Despite the high cost of the policy, the Government has pledged to keep the triple lock for this Parliament. Therefore, it is extremely unlikely that it will be axed before April 2030, experts say. Many argue that at some point the policy will have to be replaced with a way of increasing the state pension that is “more sustainable”. Here, The iPaper examines how quickly the scheme could be replaced, and the most likely alternatives. A double lock A double lock has been suggested as possible alternative to the existing scheme. Tom Selby, director of public policy at AJ Bell, said the starting point would be to determine what a “reasonable value” for the state pension should be – most likely as a percentage of median earnings. He said: “Once you have decided what that figure should be, putting in place a sensible plan to reach that level – assuming it is higher than the current new state pension amount – is the next logical step.” From there, the state pension would then be linked to either earnings growth or inflation – a type of “double lock” – Selby suggested. Simple link to earnings Maike Currie, vice-president of personal finance at PensionBee, said the simplest replacement would be an earnings-only link, as this would mean the state pension would broadly maintain its value relative to the incomes of working people. However, Steve Webb, former pensions minister and partner at LCP, warned that under the current triple lock, the state pension has been rising in line with earnings for the past few years, so getting rid of it would “save nothing” for the Government. ‘Smoothed’ earnings link The Institute for Fiscal Studies has previously recommended introducing a system called the “smoothed earnings link”, a version of which is used in Australia. In this system, the state pension increases in line with earnings but, in the event of inflation exceeding earnings, it switches to tracking inflation – giving pensioners protection from rising prices. As inflation eases off again, the state pension does not immediately return to its earnings link. Instead, the pension remains pegged to prices for a while, until it reached its previous real value – then the link to earnings is resumed. Kate Smith, head of pensions at Aegon, said this approach would reduce volatility and make costs more predictable. “Smoothing could prove to be the saviour of the triple lock rather than its end, helping keep the state pension fair, affordable and sustainable for future generations,” she said. Simple link to inflation Webb said another candidate for replacing the triple lock could be linking the state pension to inflation – something that was done between 1980 and 2010. This approach would create “big savings”, he said, but it would also substantially weaken the state pension at a time when millions of retirees are coming up to retirement age with very modest private savings. He added: “With so many people retiring today having limited private pension provision, keeping a decent state pension in place remains vital to allow people to retire with dignity.” Who will be hit most if triple lock is ditched? Selby said scrapping the triple lock would affect age groups differently, as it would depend on what earnings and inflation would be each year, and what would replace the policy. He said: “If you replace the triple lock with an earnings link, and average earnings is higher than inflation and 2.5 per cent every year, then it won’t make any difference at all. “But if earnings growth is lower than inflation, or 2.5 per cent – or both – then your increase [in the state pension] will be lower than it would have been under the triple lock.” Currie said getting rid of the triple lock would affect people at all stages of life. “For someone close to retirement, scrapping it could have a more immediate impact on their expected income,” she added. “For younger generations, the effect could potentially be greater over the long term, as smaller annual increases compound over decades.” Jonathan Cribb, deputy director of the Institute for Fiscal Studies, warned that any savings made from getting rid of the triple lock would take a long time to materialise. “The problem with funding an NHS-style social care service in this way is that there would soon be significant costs with only limited additional resources available due to moving off the triple lock,” he said. In terms of how quickly the Government could ditch the policy, Cribb said this could be carried out any time ministers chose to do so. “One concrete option would be to pre-announce that they are moving away from a particular year in the future,” he added.