For those that receive the State Pension, calls for the abolition of ‘triple lock’ won’t be welcome news.
Though it has played a vital part in the rise of the State Pension, many are unaware of the policy. The Organisation for Economic Co-operation and Development (OECD) believes that the policy should be reformed to boost growth.
This could have far-reaching effects for pensioners; potentially putting their financial wellbeing at risk. What exactly is ‘triple lock’? And why might pensioners be worse off without it?
What is the ‘triple lock’ policy?
Announced in June 2010, ‘triple lock’ was introduced by the Government, to ensure that the basic State Pension (and now the new State Pension) will rise each year by whichever is the highest out of:
- 2.5%
- Average earnings
- The rate of inflation as measured by the Consumer Price Index (CPI)
The aim of this policy was to ensure the financial stability of those on a fixed income. Before ‘triple lock’ was introduced, the basic State Pension rose in line with inflation as measured by the Retail Prices Index (RPI). This was consistently lower than rises in annual earnings, meaning that each year, the buying power of pensioners was reduced.
How has it affected the State Pension?
Between April 2010 and April 2016, the ‘triple lock’ policy has increased the basic State Pension from £97.65 to £122.30 (Source: GOV.UK). This boost in earnings over six years has seen the income of a pensioner rise at almost double the pace than that of the average worker as:
- The State Pension rose by 22.2%
- Average earnings rose by 7.6%
- Inflation rose by 12.3%
‘Triple lock’ has allowed many pensioners to beat inflation, but it hasn’t been cheap. The Government Actuary’s Department (GAD) calculates that ‘triple lock’ costs around £6 billion per year, and could rise considerably in the next few years.
The future of the policy is currently in question, with the OECD calling for abolition in order to afford measures to boost weak growth.
Who are the OECD?
The OECD is an intergovernmental economic organisation, made up of 35 member countries. It was founded in 1960 to ensure the progress of world trade, and releases a survey of the UK economy every two years.
In the latest report, released on the 17th October, a number of recommendations were made,
including:
- Scrapping the ‘triple lock’ policy
- Increasing National Insurance Contributions (NICs) for self-employed workers
Whilst the latter was temporarily adopted in this year’s Budget, the decision was ultimately reversed.
What would scrapping ‘triple lock’ mean?
The OECD’s recommendation is to link the rise in State Pension solely to average earnings; stating it would “be fairer, while it would still allow pensioners to benefit from improvements in living
standards”.
Whilst the notion that keeping the level of the State Pension down to match low rises in average earnings may be fair in the eyes of the OECD, many pensioners will disagree. The ‘triple lock’ policy protects them from the relatively high levels of inflation we have been experiencing recently, which at the time of writing has reached 3%.
Without ‘triple lock’, those receiving the State Pension will ultimately suffer a pay cut, as the reduced buying power will mean their money is gradually worth less. For pensioners without an additional income, or a way to bridge this shortfall, it could leave them vulnerable and financially worse off.
Will average earnings rise?
Maybe. Not anytime soon though, according to the Bank of England (BoE).
Under the proposed reform by the OECD, pensioners would only be better off if the level of average earnings was higher than the level of inflation. In February, the BoE predicted a decline from 2.7% to 2.2% throughout the year, with a further decline expected in 2018 (Source: The Guardian).
For more information about the State Pension, and how to bridge a shortfall in the event of a ‘triple lock’ reform, get in touch using the phone number at the top of the page.
