The rumours that chancellor of the exchequer Rishi Sunak is planning to scrap the triple lock for pensions has caused discontent among people in the UK, as it was one of the promises made by the Conservative party during the electoral campaign in 2019.
The triple lock sets out that the UK state pension increases every year according to average earnings, inflation or 2.5%, whichever is highest.
According to research by investment platform AJ Bell, nearly a third of the population (30%) believes it to be “unacceptable” that the government wouldn’t stay true to one of its manifesto pledges.
The survey showed a generational split, with those aged 55+ being twice as likely to disagree with the Treasury’s plans than people aged 18-34.
Calculations by AJ Bell revealed that the triple lock would increase the state pension by 21.3% within the next two years – 2.5% in 2021 and 18.3% in 2022 – costing the government £41.2bn ($51bn, €45.5bn).
Upratings based on average earnings would total £18.7bn, but if the increase is linked to inflation the sum would amount to £6.8bn.
Going with the latter option could save the UK government £34.4bn.
‘No surprise’
David White, managing director at QB Partners, told International Adviser: “With coronavirus support costing the government billions of pounds, and having a massive impact on the wider economy, it is no surprise that the chancellor is looking at all ways to cut costs and to protect the government against further cost impacts.
“The ‘problem’ with the triple lock pledge is that the government has promised to increase the state pension by the higher of inflation, earnings and 2.5%.
“The inflation rate is falling, and earnings are expected to reduce dramatically this year, but then recover in 2021 as employers come out of the coronavirus-impacted period.
“This could lead to an unknown liability for the government- its own forecasts say that earnings could increase by up to 18% next year.”
Ian Browne, pension expert at Quilter, said: “The chancellor is walking on a proverbial tight rope as he keeps one eye on the ballooning public debt whilst attempting to provide a much-needed boost to the economy and protecting employment as much as possible.”
Different impact for different ages
White added that it is not surprising that older cohorts might feel more strongly about the move than the younger generations because “they are likely to be impacted more immediately, whilst younger people are not necessarily considering state pensions yet and are less concerned about the proposed changes”.
However, he argues that when the manifesto pledge was made, nobody could have foreseen the arrival of a global pandemic.
“I understand that the government, at this stage, are still denying that the triple lock rules will change, but there are rumours that the chancellor is considering abolishing them and this is supported by other MPs, including Mel Stride, chairman of Treasury select committee.
“Clearly, when the Conservative party manifesto promised to keep the triple lock system, originally introduced by David Cameron, in place in 2019, the unprecedented impact of covid-19 had not been considered.
“However, in my view, the government should not make such commitments without full and proper scenario planning, which should, and I expect will in the future, include a ‘what if there is a global pandemic’ scenario.”
Consider all options
Andrew Tully, technical director at Canada Life, told IA that there are going to be different outcomes according to whether the triple lock removal is temporary, permanent or if it is an actual possibility at all.
“A change to the triple lock would adversely affect many pensioners. However, as the costs of helping the economy deal with the impact of covid-19 spiral, the government will need to look at various measures to cut spending and increase taxes,” Tully said.
“It’s unclear at this stage if Rishi Sunak is proposing a long-term change to the triple lock, or simply a change for the next year or two, due to the fact the calculation basis for the earnings part of the triple lock could result in a significant increase.
“If it is a longer-term change, a move to a double lock of inflation, or earnings growth, would safeguard pensioners to a significant degree and mean state pensions won’t fall behind the cost of living or increases in average earnings.
“However, the savings for government in moving to a double lock are modest compared to a more fundamental change. The most important thing we can all do is take control of our own financial futures, as there are no cast iron guarantees that the state pension will be around in its current form to provide a safety net when we retire.”
