A committee of MPs says that the government should abandon its commitment to the “triple-lock” protection which has applied to the state pension since it was introduced by the coalition government in 2010.
The triple lock means that weekly state pension payments rise every year by the higher of the following: average earnings, inflation or by 2.5% - the inclusion of these three factors is why it’s called the triple-lock.
This means that, even when inflation and wage growth are low or negative – as has at times been the case over recent years – pensions can still go up by a significant amount.
Now, MPs on the Work and Pensions Committee have said that the triple-lock is unsustainable and unfair on younger workers and families who do not benefit from similar levels of protection on their incomes.
An unaffordable commitment?
The committee chair, Frank Field MP, said: “Great strides have been made against the scourge of pensioner poverty and the new state pension is at a level to provide an effective minimum income and encourage personal saving. It is time for the triple-lock to be shelved.”
According to the committee, average pensioner incomes are now higher than those among people of working age, after housing costs are taken into account.
The committee’s report follows a call earlier this year from former pensions minister Ros Altmann to amend the “unaffordable” state pension guarantee.
In the summer, Baroness Altmann pointed to a report by the Government Actuary’s Department which suggested that the triple-lock has cost around £6 billion a year, with this figure set to rise in the future.
Are you overestimating your pension pot?
A "double-lock" alleged to be suitable
Altmann said that a “double-lock” – with pensions pegged to the previous year’s inflation rate or earnings growth, whichever was higher, ignoring the 2.5% clause of the triple-lock – could be more suitable given the current state of the public finances.
She added that, if the government saved money by changing its policy in this way, it may reduce the pressure to introduce further increases in the state pension age.
The Work and Pensions Committee has also recommended that annual rises in the state pension should be linked to increases in average earnings levels as well as general inflation.
Field added: “The system we propose protects pensioners and allows them to share the proceeds of future good times, but at the same time is inter-generationally fair. We call on all parties to get behind it.”
Dispelling pension myths
A policy decision in danger of outlasting its purpose?
“The triple-lock is a classic example of a political policy decision that is in danger of outlasting its purpose because politicians fear taking difficult decisions,” said Altmann, who left the government in July 2016.
“It has also been a useful policy for easily asserting that pensioners are being protected, without carefully considering the long-term as well as the short-term implications and inter-generational aspects.”
She added: “Keeping the commitment to a 2.5% rise forever makes no sense in terms of sound policy: a double-lock is much easier to justify than a triple lock policy.
“If our new government is brave enough, there is an opportunity to signal sensible thinking on pensions policy and recognise that the triple lock has achieved its purpose and now, to consolidate and protect pensioners, we can move to a double-lock instead for the future beyond 2020.”
What is a pension and how do they work?
A reaffirmed commitment
Downing Street has recently reaffirmed its commitment to the triple-lock for the rest of the current parliament, which is scheduled to run until 2020.
A spokesman for the Prime Minister pointed out that the policy was a manifesto commitment in the 2015 general election and would not be abandoned by the current government.
The 2016 Autumn Statement
In November 2016 at the Autumn Statement, the Chancellor said that the government did not plan to make any changes to the current triple-lock protection on the state pension; however, it remains to be seen whether the triple-lock will be maintained beyond the next general election, due in 2020.
Nici Audhlam-Gardiner from Saga Investment Services commented: “It looks as though 2020 could see the end of the triple lock and maybe more as the Chancellor indicated he would be looking at the cost of an ageing society in the next Parliament."
Enjoyed this article?
You can find more of the same in our Money hub, offering advice, tips and news on all things financial, or you could sign up for our Money newsletter to enjoy more articles like this delivered to your email inbox each week!