State pension Triple Lock to be replaced with ‘double lock’ with lower payouts | Personal Finance | Finance
The state pension triple lock which hands extra money to pensioners every year could be axed and replaced with a less lucrative ‘double lock’ in future, warn financial experts.
The Triple Lock is a system which sees those on the state pension handed an increase in their pension benefits payments every year in order to protect against the impact of inflation on their spending power in real terms.
The system works by increasing the money given to state pensioners every new financial year by one of three metrics: the same as wage growth, the same as CPI inflation, or a flat rate of 2.5 percent, whichever is highest of the three.
Although Labour promised to retain the Triple Lock in its manifesto, financial experts across the political spectrum think the Triple Lock is at serious risk in the longer term no matter which government is in charge.
The changing of the Winter Fuel Payment to become means tested has been met with a furious backlash but many financial experts think the Triple Lock may eventually have to be altered in some way in future as well to deal with the cost of a growing, ageing population claiming pensions for an unpredictable amount of time.
The Office for Budget Responsibility has previously identified the triple lock as a “fiscal risk”. This is due to its so called ‘ratcheting effect’, which leaves public finances exposed to higher pension costs.
The Institute for Fiscal Studies says that the triple lock makes planning the government’s finances difficult because the combination of its three components is difficult to forecast, as is the exact number of recipients with a full National Insurance record claiming the full state pension, and the number of years they will be claiming for.
Their current estimates for spending on the triple lock by 2050 range from £5 billion to £45 billion per year due to that uncertainty.
If the triple lock is changed in future, the Financial Times has argued that linking State Pension increases to earnings growth alone is fairer and more sustainable than the triple lock – a ‘single lock’ linked to wage growth.
According to the House of Commons Library, The Organisation for Economic Co-operation and Development (OECD) has suggested that pensions should be uprated by an average of earnings growth and CPI inflation, alongside additional means-tested support for poorer pensioners.
Sir Steve Webb, the former Pensions Minister who oversaw the introduction of the triple lock, suggested that the policy could be removed once once the State Pension reaches a “reasonable” share of average earnings, a system he called the ‘double lock’.
He told the i: “Once the state pension is a reasonable share of average earnings perhaps around a third you could then have an earnings link or a double lock.”
“When we started in 2010, the pension had been linked more-or-less to prices for 30 years. This resulted in things like the notorious 75p a week pension rise in 2000, followed by £5 in the year of 2001.”
“If you think about the purpose of a pension it is to preserve your standard of living when you no longer have a wage. If pensions are linked only to prices, and assuming wages generally rise faster, this would mean that the state pension falls steadily as a share of your pre-retirement income, and therefore becomes less and less adequate to do its job.”
