Two views of the State pension

The future of triple lock increases for the State pension has been called into question by two well–respected groups of economists. 

Triple lock increases to the main State pension were introduced from 2011/12, setting the yearly April increase at the greater of: 

• The rise in prices to the previous September, now as measured by the Consumer Prices Index (CPI). 

• The rise in average earnings (including bonuses) to the previous July. 

• 2.5%. 

The primary unspoken aim was to gradually raise the level of the State pension, relative to prices and earnings. A secondary goal was to avoid a repetition of the inflation-linked pension increase of just 75p a week in 1999, which attracted considerable political flak. 

At the time of the triple lock’s introduction, the Office for Budget Responsibility (OBR) projected that by 2029/30 it would be costing £5.2 billion a year more than if increases had been solely linked to earnings growth. Unfortunately, that proved to be one of the OBR’s more inaccurate projections. 

In a daunting document entitled ‘Fiscal Risks and Sustainability Report’, the OBR now projects that the extra cost will be £15.5 billion in 2029/30, almost exactly three times its original figure. The OBR says that its original projection assumed a few years in which the triple lock would outpace earnings. However, the reality was that since the start of the triple lock, the UK has seen more volatile inflation and lower earnings growth than the two decades prior to the triple lock’s introduction (which had guided the OBR assumption). Looking forward to 2073/74, the uncertainty surrounding what payments will be triggered by the triple lock encouraged the OBR to include three potential cost estimates for pension uprating, with £48 billion in today’s money being the OBR’s most likely outcome.

Meanwhile, at the Institute for Fiscal Studies (IFS), economists have produced a pension report that also highlights the high cost of the triple lock. The IFS says “a reasonable estimate … for additional spending on the state pension in 2050 due to the triple lock, above and beyond earnings indexation, would be between £5 billion and £40 billion a year in today’s terms.” 

After the problems caused to the government by means-testing the Winter Fuel Payment, the triple lock should be safe for the rest of this Parliament. Thereafter, it would be unwise to assume its prolonged survival in your retirement planning.  

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