The state pension is set for a bumper boost of 8.5% next April, thanks to the government’s triple-lock mechanism.
But this has not yet been confirmed, with rumours that a lower figure could be used in order to save money.
And now experts claim that last week’s inflation data could be another factor in the decision-making, as falling inflation makes an 8.5% hike in the state pension “stick out like a sore thumb” and “raises real questions around intergenerational fairness”.
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Inflation has dropped to its lowest level in two years, with the consumer prices index (CPI) rising by 4.6% in the 12 months to October, down from 6.7% a month earlier.
If the state pension rises by 8.5% next April - pushing the full new state pension up from £10,600 a year to £11,502 - it could mean pensioners potentially receive an uplift of double the rate of inflation.
“The headline rate of inflation may come down further as we head into the early months of 2024. This means there’s a real chance that a state pension increase of 8.5% could be more than double the ruling rate of inflation come next April. That’s unsustainable,” comments Steven Cameron, pensions director at the insurer Aegon.
We look at whether it’s fair to keep the triple lock in place, what the government could do, and whether an announcement will be made in the Autumn Statement this Wednesday.
How does the triple lock work?
Under the triple-lock guarantee, the state pension increases each April in line with wage growth (as measured in the three months to July), inflation (September's CPI reading), or 2.5% – whichever is higher.
CPI was 6.7% in September, while wage growth was 8.5%, meaning the state pension should go up by 8.5%.
The triple lock is not a legal requirement. The government is legally required to increase the basic and new state pension at least in line with average earnings each year. In contrast, the triple lock is a commitment.
The triple lock was introduced by the coalition government and came into effect in April 2011.
Why could an 8.5% rise be seen as unfair?
This sort of rise is far above October's rate of inflation (4.6%), but also much higher than inflation readings that we’ve seen in recent months.
Cameron argues that volatile inflation and wage growth is making the triple lock unsustainable, and such a large increase - paid for out of the National Insurance of today’s workers - raises questions around intergenerational fairness.
“It piles pressure on the government as it weighs whether or not to honour the triple lock in full next April,” he explains.
According to Becky O'Connor, director of public affairs at the pension provider PensionBee, rapidly falling inflation makes a rise of 8.5% in the state pension “stick out like a sore thumb”.
She tells MoneyWeek: “If inflation and wage growth fall further, as is expected, this boost to the income of retirees looks way out of kilter and will only add to calls that the triple lock should be scrapped or reformed.”
Reasons for keeping the triple lock
O’Connor says it’s important to remember that sometimes the triple lock disadvantages pensioners, for example, when inflation and wage growth readings have been lower in the relevant periods, then risen before the state pension uplift is introduced, meaning “pensioners have effectively fallen behind the rest of the country”.
She also stresses that for some pensioners, the state pension is their only income.
“The state pension has improved over the years, but it’s still not generous by any stretch, relative to other countries and living costs. It’s important to bear in mind that older people have less agency over their incomes than younger workers, who might still look forward to salary increases.”
O’Connor adds that any changes that make the state pension less generous are “likely to harm future generations of pensioners more than the current crop. Today’s workers are already grappling with the prospect of defined contribution pension pots that will be inadequate for a decent retirement so they are likely to need that boost from the state pension arguably even more than today’s pensioners."
The other big reason to keep the triple lock is a political one. With a general election around the corner, the government won’t want to upset the “grey vote”.
Cameron comments: “There have been reports the government is considering adjusting the earnings growth figure to take out the impact of recent one-off public sector bonuses, which have created a ‘distortion’. While trimming it back to say 7.8% would save the government hundreds of millions, it risks the wrath of the pensioner population ahead of an almost certain general election next year.“
What could the government do?
The government could decide to plough on and give pensioners an 8.5% pay rise. After all, it isn’t that big compared to the rise that came into effect in April this year - a record-breaking 10.1%.
“With rumours of the chancellor having more fiscal headroom than anticipated, the government may decide to grant the full 8.5%,” notes Cameron.
It could also downgrade it to a 7.8% rise, which would be earnings growth excluding bonuses. This could allow the government to claim the triple-lock pledge is still being honoured.
Another option is announcing a review into whether the mechanism is still fit for purpose. O’Connor thinks this is a possibility, and some financial companies like Hargreaves Lansdown are calling for it.
“Pensioners need certainty over when they will receive the state pension, and how it will rise in future. The time has come for a review of the state pension and the triple lock,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.
When can we expect an announcement?
The chancellor could make an announcement about the state pension in this week’s Autumn Statement.
But it may also make a separate statement, especially if it decides to deviate from the triple-lock methodology.
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