Triple lock – an unsustainable system

With the general election in full swing, there is much speculation about what changes the next government will bring. And the subject of the triple lock pension has come to the fore.

With talks of a ‘double lock’ coming into play in the future, Gary Smith, chartered financial planner at Tilney, looks at who is benefitting from the current system and what a double lock scheme might mean for savers.

“There is no doubt that the triple lock has certainly benefited those in receipt of their State Pensions, as the minimum 2.5% annual increase has recently exceeded both average earnings and inflation. The Institute of fiscal studies said in its recent assessment that “Between April 2010 and April 2016 the value of the State Pension has been increased by 22.2%, compared to growth in earnings of 7.6% and growth in prices of 12.3% over the same period”.

“The Government’s Actuarial Department (GAD) calculated that, during 2015/16, the cost of applying the 2.5% minimum increase was £6bn more than had the State Pension just increased in live with average earnings.

“With an ageing UK population, the cost of the State Pension will continue to rise and represent a greater percentage of GDP in the future. Simply put – the country just can’t afford it. As the Chancellor faces the challenge of tightly controlling Government expenditure to reduce the Budget deficit, retaining the ‘triple lock’ will be too much of a burden and result in tax rises in other areas to compensate.

“A shift to a ‘double lock’ would see the removal of the minimum 2.5% annual increase, with future increases subject to Average Earnings or Inflation. This would ultimately reduce the burden on the Treasury over the long term, if increases in Average Earnings and Inflation remains below 2.5% moving forward.

“I suspect that we will see further changes to the State Pension in the future, with the timescale of increasing the State Pension age accelerated, as the Treasury seeks to manage the future costs of maintaining this benefit. With this in mind, I would encourage savers to consider how much they are saving towards their retirement, as the State Pension is unlikely to be as generous as it has been under the ‘triple lock’ regime, and the age from which it will become payable will no doubt increase.”