Pensions triple lock to be suspended

The triple lock is considered a lifeline for pensioners keen to protect their income. But is that about to change? Let’s take a look.

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Since its introduction in 2011, the controversial ‘triple lock’ formula has effectively guaranteed a minimum rise in the State Pension each year. The government announced on 7 September that it will suspend the average earnings component for one year.

Here’s what you need to know.

[top_pitch]

How does the State Pension triple lock work?

The State Pension triple lock has been a key feature in every Conservative Party election manifesto since it was introduced in 2011.

The triple lock ensures that the State Pension rises by the highest of the following:

  • The annual rate of inflation (up to September)
  • Growth in earnings (in the three months to July)
  • 2.5%

Under the triple lock system, the value of the State Pension is guaranteed to rise each year.

Prior to the days of the triple lock, the State Pension rose in line with the Retail Prices Index. Nowadays, the government uses the Consumer Prices Index (CPI) as a measure of inflation instead.

However, if inflation is below average earnings or 2.5%, then the CPI is not used to calculate the rise in the State Pension.

What are the criticisms of the triple lock?

Critics claim that the triple lock is expensive and unsustainable, especially as the UK has an ageing population. Last year, the State Pension cost the government around £101.2 billion, compared with £98.8 billion the previous year.

They also point to the unfairness of guaranteeing hefty rises in the State Pension each year while working people do not always enjoy similar rises. This can happen if the average growth in earnings is lower than the CPI or 2.5%.

Many also believe that the triple lock formula highlights a wider problem with the UK’s political system. That’s because many feel it is a way of getting ‘easy’ votes from those aged 65 and over.

Pensioners outnumber young people and generally vote in big numbers. This may be the reason why the three major UK political parties, the Liberal Democrats, Labour, and the Conservatives, have all spoken positively about the triple lock.

[middle_pitch]

Why has it been suspended in 2021?

According to the Bank of England, average earnings growth in 2021 could hit 8% this year.

That’s because average wages in 2020 fell sharply as a result of the Covid-19 pandemic. In 2021, wages have technically risen following the reopening of the economy.

Yet this 8% calculation may be misleading. The figure doesn’t take into account the fact that many people received a reduced income last year. For example, some lost their jobs and claimed benefits or used the government’s furlough scheme.

Should earnings growth be 8%, then under the triple lock formula, the State Pension should also rise by 8%.

Many feel that such a hefty rise would be unfair, especially as many workers have faced job losses or pay freezes throughout 2021. Furthermore, the government’s forecaster said that an 8% rise in the State Pension would cost £3 billion more than predicted.

As a result, the average earnings component will be suspended for 2022/2023. Conservative MP Therese Coffey said the reason for the suspension was to stop pensioners “unfairly benefiting from a statistical anomaly”. 

Triple lock suspension: what else do I need to know?

With the average earnings component suspended, the State Pension will instead increase in line with inflation, or 2.5% in 2022/2023. However, the triple lock formula will return the following year when the average earnings figure is more stable. 

Whatever your views on the current system, it’s always a good idea to grow your understanding of pensions. To help you get to grips, see our article on how pensions work.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

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