Should the pensions triple lock be scrapped?

The pensions triple lock had been a key plank of the government’s offer to older voters, but the promise to gold-plate the state pension is looking increasingly unaffordable.

Old ladies drinking champagne © Getty Images
Happy days for pensioners – but they might not last for much longer © Getty
(Image credit: Old ladies drinking champagne © Getty Images)

What is the pensions triple lock?

The pensions triple lock is the guarantee, introduced by the coalition government in 2011, that the state pension is increased each year by either the (CPI) inflation rate, the rise in average earnings, or 2.5% – whichever of those three is the highest. The lock applies to both the “basic” state pension and the higher, flat-rate pension paid to people retiring since April 2016. This year, for example, the pension rose by 3.9% in April, in line with the rise in average earnings last year. But when the government introduced the triple lock, it did not foresee the prolonged stagnation in real earnings growth, which has meant that a guaranteed 2.5% increase has served pensioners very well compared with workers. In the ten years since the financial crisis, state pensions have increased 37% in cash terms, compared with less than 20% for average earnings. The triple lock has become part of the Tory pitch to older voters: it was reaffirmed in the party’s election manifestos in 2015, 2017 and 2019. But now, chancellor Rishi Sunak is reportedly preparing to dump it.

Why does it need unlocking?

The triple lock has been criticised for years as no longer appropriate in an age of low wage rises and growing inter-generational inequality. But now there’s a particular problem due to the wild fluctuations in wages expected as a result of the Covid-19 shutdown. Depending on the depth of the recession and the strength of the rebound, the government could be facing a massive pensions liability as wages fall but then bounce back by as much as 18% in 2021. This year, wages have “artificially” slumped as a result of the furlough scheme. But next year, they are expect to bounce back as people go back to work full-time, or are made redundant. Under the existing triple lock, pensioners will still get 2.5% next year. But in 2022 they’ll benefit from the huge bounce back in 2021 earnings. Plainly, that’s “not fair on working people”, says The Sunday Times. “The triple lock should be stood down and replaced by a double lock to give pensioners 2.5% or the inflation rate.”

What are the figures?

The latest forecasts from the Office for Budget Responsibility (OBR) suggest that average earnings will fall 7.3% in 2020, but rise by 18.3% in 2021. They reckon inflation will be 1.2% this year and 2.3% next year. Of course, these figures may turn out to be way off the mark: there is too much uncertainty about the post-Covid-19 recovery to be sure of much. However, what this scenario means for state pensions is that, with the triple lock still in place, the flat-rate pension would rise by 2.5% in 2021 and 18.3% in 2022. That’s a two-year cumulative rise of 21.3%. For the flat-rate pension received by people who have retired since April 2016, that means a jump from £175.20 a week to £212.45.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

How does that compare to no triple lock?

If the state pension rose in line with the OBR’s predictions for average earnings, it would increase 9.7% over the next two years (down 7.3%, then up 18.3%). Clearly, that’s still a decent uplift. Or, if the pension rose in line with predicted inflation it would rise by just 3.5% (1.2% and then 2.3%), rising to £192.15 a week. And if the triple lock became a double lock (removing the earnings link), it would increase by 5.1% (two years of 2.5%) over the same period to £184.07. That “double-lock” scenario is what many pundits are expecting to happen – perhaps with a promise of reintroducing the full triple lock after two or three years.

What’s the effect on the public finances?

These might sound like small sums, but there are an awful lot of pensioners. The triple-lock promise “simply wasn’t designed for a world where inflation or earnings are veering so wildly from one year to the next”, says Tom Selby of AJ Bell. According to his analysis, based on previous OBR costings and its estimates for future inflation and earnings, retaining the triple lock for 2021 and 2022 would cost over £22bn more than a straight link to average earnings and £34bn more than if it were only protected in line with inflation. That’s a big chunk of money and compares to overall UK government spending of £109bn on pensioners in 2018-2019 (expected to rise to £115bn in the current year, on OBR figures).

So what will the government do?

The government has two options, says Selby. “Carry on with the state pension triple lock and create a colossal chasm in the public finances, or revisit the policy and risk the wrath of millions of pensioners.” However, any break of the triple lock is likely to kick off a new round of debate about its long-term sustainability. Rather than remove the earnings link, most previous proposals to modify it have proposed removing the 2.5% guarantee. According to the Social Market Foundation, removing that guarantee could save the government £20bn over the next five years.

Is the pensions triple lock really unfair?

Some defenders of the triple lock (such as Stephen Bush in the New Statesman) argue that attacking it on grounds of inter-generational fairness is misconceived. That’s because today’s pensioners are only going to benefit from it for a fairly short period of time. In the long run, the triple lock represents a strengthening of the state’s role in pension provision and the people who will benefit most from decades of guaranteed increases are the young. And there’s certainly a lot of ground to make up. Currently, the UK devotes a much smaller percentage of GDP to state pensions and other benefits for pensioners (around 5%) than most other advanced economies. However, the bigger picture is that the triple lock is already becoming unaffordable, given demographic trends, and Britain already has a relatively big and sophisticated private system; it makes sense to rely more on that to help ease the burden on the state over the longer term.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.