The triple lock pension policy may become a thing of the past under Theresa May’s plans, which involves replacing it with a less expensive ‘double lock’ policy and diverting some of the funds to the UK’s overstretched social care industry.
Nicola Hartley, Independent Financial Advisor at Simpson Millar, takes a look at what this could mean for the UK’s growing ageing population.
A Costly Pension System
First introduced by the coalition Government in 2010, the triple lock pension aimed to reduce poverty amongst pensioners. Under the system, the basic state pension rises every year, and the rate at which it increases depends on which of these 3 factors are the highest: wages, inflation, or 2.5%.
At a time when the economy is struggling and wage growth remains low, the Government is now looking at whether a ‘double lock’ policy could be put in place, which cuts out the 2.5% minimum annual rise.
According to the Institute for Fiscal Studies (IFS), pensioners have been less affected than other groups of individuals by the slow growth in inflation and earnings over recent years.
Between April 2010 and April 2016, the value of the state pension grew by 22.2%, in comparison to the 7.6% growth in earnings and 12.3% growth in prices during the same time frame.
This has caused the value of the state pension to rise to its highest share of average earnings since 1988, with the weekly pension now standing at £155.65.
With a pensions bill of £98billion in the previous tax year, some MPs have argued that the rising state pension is unaffordable and that a future system could instead be based on average earnings.
Stretching Public Spending
Some have also said that the plans for a double lock policy could be beneficial for the social care industry, with former Conservative cabinet minister Lord Willetts suggesting that they could tie in with “a proper policy on social care.”
Discussing the plans, Lord Willetts added:
“If you look at any pictures of where public spending is going in the future, the protections for pensions are pushing up the share of public spending that is going on pensions, and then that means when resources are limited, other areas of spending will suffer.”
Adding her support to the Government’s plans, former pensions minister Baroness Ros Altmann said that there’s “a strong case for reform” as “The triple lock has done its job. There’s strong support for getting rid of it – the big questions is when, and how.”
Only some aspects of the state pension were protected, Ros added, and they didn’t include the pension credit that is given to pensioners whose weekly income falls under a certain amount.
Protecting The Future Of The Economy
Whether the triple lock policy will be affordable in the future is one of the questions being debated by economists, including Paul Johnson, director of the IFS:
“The problem with the triple lock is that it results in the pension increase being a random number, because it depends on how earnings, inflation and 2.5% relate to one another in a given year.”
When questioned about the future of the triple lock policy during prime minister’s questions, Theresa May suggested that the triple lock policy was being reviewed and that “pension incomes would continue to increase.”
Andrew Gwynne, campaigns chief for Labour, expressed his concerns for future pensioners, arguing that under the current Government “it risks being consigned to history.” Labour has vowed to retain the triple lock policy.
“The cost of the triple lock policy is an increasing issue for the Government. It’s estimated that by 2040 the cost of providing a state pension provision will increase from £90billion (an approximate cost at present) to £215billion due to the increase in the number of people who will be over state pension age.”
“Whilst it’s positive news that the Government is thinking of new ways to resolve the funding crisis in social care, and the increasing costs of an ageing population, it doesn’t deal with the main issues relating to the current state pension policies.”
“At present, the cost of the triple lock is being partially managed by increasing the age at which individuals become entitled to the state pension (by 2046 the state pension age will be 68).”
“If the current application of increases continues this could mean for many that they have paid national insurance contributions towards a state pension that they may be unlikely to receive. With the maximum level of single state pension entitlement being capped at 35 years of national insurance contributions and the state pension age being 68, many individuals will have contributed towards a pension income for over 40 years with no additional benefit.”
“By, allocating the funds saved from reducing the lock from triple to double to social care this may result in the policy being problematic in the long term, particularly if the Government doesn’t deal with issues surrounding the continued increase in the state pension age.”