Can we still afford triple lock pensions?

The state pension, protected by the ‘triple-lock’ was recently described by tax expert Philip Fisher as, “The three-horse race where every bet pays out.” Which, all things considered, pretty much sums it up.

Historical background

Almost the first thing that George Osborne did when he became Chancellor of the Exchequer, as part of the Coalition Government which came into office in 2010, was to take measures to correct the national scandal of pensioner poverty.

The plight of state pensioners had largely come about because of minimal annual rises in the state pension, stretching back over many years, during a time of above average inflation. In the Spring of 2010, it stood at a miserly £95.25 (£4.953 p.a.) less than a fifth of the level of median earnings or average salary, which was £25,879 st that time.

The Chancellor, aided and abetted by his successors, brought in a number of measures that included:

• The state pension was given an immediate 2.5% boost at a time when the overall national wage growth had remained nearly flat during the previous 12 months

• He also introduced the pension triple lock, under which the annual increase would be the highest of Inflation, based not on the RPI (Retail Prices Index) but on the higher CPI (Consumer Prices Index), or average earnings growth in the UK, subject to a guaranteed minimum rise of 2.5%

• He then began a transitional arrangement to gradually increase the retirement age for women, so that by 2018 they would retire the same as men on their 65th birthday

• In 2018 the state retirement age began increasing until it reached 66 in October 2020

• The state retirement age is currently going through a further gradual transition and will be 67 by October 2028

• There are plans to further increase the state retirement age to 68 by 2040

The triple lock has clearly been a success for pensioners, with the full state pension having risen by 153% compared with 2010. However, the elephant in the room is that average salaries in the UK have only risen by 50% over the same period.

The current state of the nation

Currently, increasing numbers of families are struggling to put food on the table, plus there is an ongoing debate about how to free up funding for the NHS, defence and just about every other aspect of our communal lives. There is not however much discussion about the benefits of what many experts see as an increasingly generous state pension.

When the national living wage increases by a mere 50 pence per hour there is uproar. When junior doctors are castigated for seeking to restore their pay in real terms the media goes mad and pretty much everyone believes that the benefits bill has totally spiralled out of control. The general public however, barely raised a murmur when the state pension rose by 4.8% two months ago, which is somewhat counter-intuitive.

Can we still afford the triple lock?

In 2026, although the level of inflation stood at 3.8%, pensioners still received a 4.8% uplift based on average earnings. Following the banking crash in 2008, for a number of years banks did not pay much, if any interest on deposits, but pensioners were still getting a 2.5% uplift.

Logically, many pensioners accept that the underlying principle of the triple lock has achieved its objective, with many accepting that there needs to be changes in an era of tightening finances, The problem is that they also believe in the principle of ‘mañana’. In other words, whilst intellectually they accept changes are needed, self-interest results in them collectively wanting to kick this particular can, far down the road.

The inescapable fact for any government wishing to make changes, is that the UK’s 12 million pensioners all have the vote and statistically are more likely to use them than younger people. This is why successive governments have been afraid to rock the boat, even though in the last financial year HMG spent just over £125 billion on state pensions, or over 10% of total public spending.

The problem is only going to get worse, since the population is ageing fast, with the knock-on effect being increasing numbers of pensioners entitled to the state pension.

What can be done?

Whilst the current system results in pensioners doing better than many other groups in society, this does come at a cost, the main one being the gradual increase in the age of retirement. Most of us would accept that pensioners deserve a reward for the decades of service (and taxes paid) that they have given to the country but this constant drain on limited resources is in nobody else’s long-term interest.

The only Chancellor to make a stand was Rishi Sunak, who suspended the earnings element of the state pension triple lock for the 2022–23 financial year. Sunak explained at the time that pensions would rise by a lower rate (based only on inflation or 2.5%) instead of the distorted high wage growth from workers coming off the furlough scheme.

There is however some hope as we move forward, with the automatic enrolment pension scheme for workers, which was actually introduced by George Osborene in 2012. This scheme has the long-term goal of moving most workers into private pension schemes, with the eventual aim of the state pension merely being a safety net and therefore affordable, but more on this in next week’s Blog..

Accountant’s view

I will be exploring the problem of individuals not saving enough for their pension in next week’s Blog, but in the meantime, if you have any thoughts on the subject, please let me know.