By Professor Glauco De Vita and Dr Harjit Sekhon, Centre for Business in Society
When was the triple lock introduced and what is it?
The “triple lock” was introduced by the Conservative/Liberal Coalition Government in its first Budget after the 2010 election (HM Treasury, Budget 2010, June 2010, para. 1.107, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/248096/0061.pdf) as a safeguard for pensioners to ensure that the state pension kept pace with the rising cost of living. Under the guarantee, the rise in the state pension (both the basic state pension as well as the new state pension for people who retired after 2016) was to be applied in line with the highest of these three measures every year:
- A flat 2.5% rise
- Average earnings/wage growth (measured from May to July each year)
- CPI inflation (measured in the year from September every year)
In theory, under stable macroeconomic conditions, this safeguard seems like a good idea to protect pensioners’ income. And this is exactly why the mechanism did its job between 2010 and 2020, a period characterised by relatively low inflation and low wage growth. However, during the pandemic lockdown of 2020, the economy faced huge disruption, with millions of workers losing their jobs while – under the triple lock pension guarantee – pensioners saw their state pension rise by 2.5%. This was followed in 2021 by an economic rebound, where wages grew at nearly 9%, thus forcing the Government to step in April 2022 to cap the state pension rise at 3.1% (effectively suspending the earnings element of the triple lock pledge for 2022-2023, which would have afforded a rise of over 8%), arguing that the Coronavirus pandemic economic disruption caused an artificial boost in wages.
Nevertheless, in the autumn statement of November 2022, the Government reaffirmed its commitment to honour the triple lock guarantee for the 2023/24 tax year. This resulted in a rise of the state pension of 10.1% from April 2023, in line with the CPI measure of inflation (the highest of the three measures of reference under the triple lock).
What is the likely effect of the state pension uprating policy for the year 2024-2025?
Looking forward, wage growth is currently (at the time of writing, 22 August 2023) the highest of the three metrics, at nearly 8% (ONS data show that between April and June average wages rose at a rate of 7.8% annually), setting the scene for another major boost to the state pension that has already caused many policy experts to ask questions about the viability of the triple lock, especially given the delicate state of the UK Government finances.
According to the firm ‘Interactive Investor’, calculations based on Office for National Statistics (ONS) wages data, show that the state pension triple lock could reach £9bn in 2024/25, with the total state pension bill £2bn higher than the current Department for Work and Pensions (DWP) forecast (Pension Age, 2023, https://www.pensionsage.com/pa/State-pension-triple-lock-cost-forecast-to-reach-9bn-in-2024-25.php). Furthermore, as more people retire with longer life expectancies, the cost of the state pension payments will continue to increase (Dawson, 2023, https://www.express.co.uk/finance/personalfinance/1780384/state-pension-triple-lock-future).
Given the above, calls such as “It’s time to be brave and tear up the triple lock” (The Telegraph, 18 August 2023, www.telegraph.co.uk/money/consumer-affairs/its-time-to-be-brave-and-tear-up-the-triple-lock/) are now a regular feature in the media. Nonetheless, the commitment to the triple lock has clear political connotations and it would take a very brave Prime Minister to break the Tories’ triple lock manifesto pledge for a second time in the space of three years, especially so close to the next general election (Howard, 2023, https://www.dailyrecord.co.uk/lifestyle/money/state-pension-triple-lock-rule-30724257). There is also the question of whether the next Government will want to alienate an important cohort of voters – one that does turn out to vote – by calling into question the triple lock. But how sustainable is the triple lock guarantee?
Sustainability of the triple lock
Although in 2010 the triple lock appeared to be a fair response to the sliding real value of the state pension and hence a reasonable safeguard to protect this vital state benefit (thus also helping the poorest pensioners), it is becoming evident that the pledge is not sustainable in the long-run. This has recently led many commentators to call for its abandonment (see, e.g., Howard, 2023).
First, the fact that the pension rises every year by the highest of the three metrics means that it is inherently more generous than any of its three individual measures. This takes the growth of the state pension to an incessantly divergent upward trajectory vis-à-vis both wages and prices. This pattern has been described in some quarters as a ‘ratchet effect’ whereby the state pension keeps rising indiscriminately irrespective of the state of the economy and what is happening to other groups’ earnings and incomes (Parliamentary Business, 2023, https://publications.parliament.uk/pa/cm201617/cmselect/cmworpen/59/5906.htm.).
Second, from an equality perspective, the triple lock is inherently unfair intergenerationally since it guarantees prosperity to one societal group, pensioners, at a time when many working-age benefits have been indexed or revalued by less than inflation, with younger groups thus bearing the brunt of the cost-of-living crisis.
Clearly, the triple lock is not necessarily the fairest mechanism to address the protection of the state pension and is not sustainable indefinitely as it may turn out to be too expensive to maintain. It puts further pressure on government borrowing, especially at the already out-of-control level of public debt. If pensioners need financial help, support might be better targeted according to needs and not necessarily by prevailing market conditions.
Conclusion
Whether we are near the end of the triple lock remains to be seen. However, it is evident that in its current design, this safeguarding mechanism is not affordable in the long or even medium term. Hence, in the next Parliament the Government will need to balance the dichotomy of the pension cost versus the pension age, with the latter being constantly pushed further back. Against this backcloth, individuals are best advised to plan early in their working life for a decent income at retirement to guard against any uncertainty about the UK state pension.
Within the Centre for Business in Society (CBiS) much research attention continues to be paid to aspects related to equality, diversity and fairness also in relation to pensions and planning for retirement (see, e.g., Dr Sekhon’s White Paper titled ‘Engaging with your pension’, available at: https://www.coventry.ac.uk/globalassets/media/global/08-new-research-section/cbis/white-papers/2005-engaging-with-your-pension.pdf) and the broader research area of individual financial wellbeing, a research track led by CBiS’ researchers such as Prof. Sally Dibb, Dr Lindsey Appleyard and Dr Aslam Hussan.
References
Dawson, N. (13 June 2023). Daily Express. State pension triple lock under threat as policy faces ‘heightened challenges’.
Pension Age (11 August 2023). State pension triple lock cost forecast to reach £9bn in 2024/25. Available at: https://www.pensionsage.com/pa/State-pension-triple-lock-cost-forecast-to-reach-9bn-in-2024-25.php
HM Treasury (June 2010). Budget 2010. Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/248096/0061.pdf
Howard, L. (17 August 2023). Daily Record. State Pension Triple Lock could be due review as bumper annual uprating on the way next April.
Parliamentary Business (2023). The Triple Lock. Available at: https://publications.parliament.uk/pa/cm201617/cmselect/cmworpen/59/5906.htm.
The Telegraph (18 August 2023). It’s time to be brave and tear up the triple lock. Available at: www.telegraph.co.uk/money/consumer-affairs/its-time-to-be-brave-and-tear-up-the-triple-lock/.
Through understanding the impact of organisations’ activities, behaviours and policies, the Centre for Business in Society at Coventry University seeks to promote responsibility, to change behaviours, and to achieve better outcomes for economies, societies and the individual.
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