Unpicking the pensions triple lock: who’s to say what’s ‘fair’?

To recap, the triple-lock was introduced in 2010 by the Tory-Lib Dem coalition government, and remained a pledge in the Conservatives’ last manifesto prior to the 2019 election. It guarantees that state pension payments will increase each year by either 2.5%, the rate of inflation, or the increase in average earnings, whichever is highest.

The aim is to guarantee that the value of pension payments is not eroded by the increasing cost of living, as happened throughout much of the three decades from 1980 onwards. By 2010, the basic state pension amounted to just 16.3% of average earnings.

That has improved since the introduction of the triple-lock five years ago, but the basic pension still stands at a meagre 19% of earnings, while the new state pension introduced in 2016 is worth 24.8% of the average. The prospect of a record-busting rise brought on by the aberrations of the pandemic is no doubt welcome among those who depend on this income.

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Job losses during the pandemic have been highest among lower-paid occupations, decreasing their weighting on average earnings. Meanwhile, the return of higher-paid professionals from furlough – when they were paid 80% of their wages – to full-time work has further contributed to what has been described as an artificially high increase in earnings.

Current figures from the Office for National Statistics (ONS) show that excluding bonuses, annual UK earnings were up by 7.4% in June. Based on that, economic forecasters at the Office for Budget Responsibility (OBR) predicted in July that pensioners could see their payments rise by as much as 8% from April of next year.

The OBR says this could cost an extra £3 billion annually, which has raised considerable disquiet over public finances already stretched to the limit by the Covid crisis.

Speaking last month in an interview with BBC Breakfast, Rishi Sunak dropped strong hints that such a steep increase will not go ahead. Asked about the possibility of this happening while Universal Credit uplifts are withdrawn from the poorest, the Chancellor said he “very much recognised people’s concerns”.

“What I would say is the numbers that you mention at this point are speculation because we haven’t actually got them yet,” he said. “That happens later on, but I do recognise people’s concerns on this.

Women account for a large proportion of those who rely on a state pension. Picture: Kirsty O’Connor/PA Wire

“I think they are completely legitimate and fair concerns to raise, and what I would say is when we look at this properly at the appropriate time, [fairness] will absolutely be driving what we do, and we want to make sure that the decisions we make and systems we have are fair both for pensioners and for taxpayers.”

Left to ponder how this might translate into the reality on the ground, some have speculated there could be a one-year suspension of the earnings inflation element of the equation, or that “distortive data” from the pandemic could somehow be stripped out to create a more realistic measure of underlying earnings growth. A further suggestion has been to base the pension increase on a two-year average of the growth in either wages or inflation, which would roughly halve the amount received under the triple-lock.

Such solutions would naturally sound reasonable to younger workers whose employment prospects have been hit very hard by the pandemic, and who pay for state pensions through their national insurance contributions. With persistent doubts over whether the system will still be there when they reach retirement, today’s triple-lock looks like a mandatory investment with few returns.

Yet the fact remains that at less than a quarter of average earnings, the UK pays one of the worst state pensions anywhere in the developed world. The full new state pension for those who reached retirement after April 2016 is worth £179.60 per week, while the basic state pension for older retirees is worth £137.60.

And though some pensioners are on very good incomes, millions are not. While it is widely assumed that retirees live in homes they have already paid for, figures from the ONS show that nearly one in five (17%) are in fact renters. More than half of them – 58% – have annual housing costs of £6,000 or more, which amounts to nearly two-thirds of the yearly income of some £9,360 from the new state pension.

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An increase in the region of 8% would add an extra £14 or so to the weekly new state pension, taking the total to approximately £194. This might not sound much to the more fortunate, but for those who depend mostly or solely on a state pension – the majority of whom are women, because they tend to have less private pension income – such sums can be crucial.

This is yet another facet in the wrangle over intergenerational fairness that has become an increasingly common topic of discussion, with young people focused on job and housing insecurity while their elders fret about social care systems that are increasingly unfit for purpose.

Challenges to living standards affect different generations in different ways. The evolution of technology, changing economic circumstances, and the vagaries of war or pandemics ensure that no two age groups will encounter the same hardships.

Yet no one would advocate rationing for today’s children as a way of levelling the playing field with those who grew up during the Second World War. Nor are we likely to see any push for those who received university grants in decades past to return them in consideration to those who now rack up loans to fund their education.

The triple-lock debate risks fanning the flames of a cross-generational battle that benefits no one, particularly considering the likelihood that state pensions will become increasingly important as access to good company pensions continues to diminish. None of it is “fair” on anyone, and solutions won’t be found amid a barrage of finger-pointing.