At the Labour Party Conference in Liverpool prime minister Andy Burnham announced plans to end the triple lock guarantee to help fund his plans for social care. This commitment, in place for 15 years, has ensured the state pension increases every April by whichever of consumer price inflation (CPI), average wage growth and a flat rate of 2.5% is the highest.
While any changes will not be brought in until 2030, replacing the triple lock guarantee with an inflation link, even one with a minimum increase of 2.5%, risks the state pension gradually losing pace with earnings, and causing pensioners’ income to fall in value compared to workers.
The plan is to address this by ensuring the state pension ‘holds its value relative to earnings over time’. But we will have to wait to delve into the detail of exactly how this can be achieved in practice.
What the state pension should be and how it should be increased is a tricky question deserving more than a cursory glance. The starting point needs to be setting out what replacement rate the state pension is aiming to achieve and establishing a path to reach that goal.
Research suggests ditching the triple lock will be divisive. That’s why politicians across the board have been steadfastly wedded to the state pension triple-lock for so long, despite growing criticism of the cost of the pledge and the potential intergenerational unfairness it is baking into the system.
This first step of ripping off the band aid and acknowledging the triple lock simply cannot exist forever is probably the hardest. Andy Burnham and his government now need to seriously ask what the state pension should be worth, when people should receive it and how much this will cost.
How the triple lock has pushed up the cost of the state pension
Since it was introduced, the triple lock has resulted in the state pension increasing in line with CPI five times, one of which was the result of a temporary suspension of the earnings link.
Earnings have been used to index the state pension in six years, while the 2.5% minimum applied in four years. In the first year of the triple lock, in April 2011, RPI was used as a one-off since it was higher than CPI, wages or 2.5%.
As a result, the triple lock has increased the state pension by 89%, while the increase in earnings over the same period, measured by average wage growth from the previous July, has been 66%.
Rachel Vahey: Head of Public Policy
Rachel is AJ Bell's Head of Public Policy. She helps financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients.
Rachel...