'Triple lock' state pension should become 'double lock', says Altmann
The former Pensions Minister Ros Altmann believes a government guarantee that state pension will rise each year by at least 2.5% should be dropped from 2020.
Since 2010, the "triple-lock" policy has meant that pensions rise by whichever is highest of the inflation rate, average earnings, or 2.5%.
However, Lady Altmann, in an interview with the Observer newspaper, said the triple lock has "outlived its purpose" and should be turned into a double lock, based on inflation and earnings.
She said: "Absolutely we must protect pensioner incomes, but the 2.5% bit doesn't make sense. If, for example, we went into a period of deflation where everything, both earnings and prices, was falling then putting pensions up 2.5% is a bit out of all proportion. Politically nobody had the courage to stand up and say we have done what we needed to do.
"The cost of the triple lock on the public finances from 2020 onwards is enormous. And if you reduce it to a double lock you save billions of pounds."
A Department for Work and Pensions forecast of the cost of the Triple Lock in July 2011 indicated that it could be as high as an extra £45 billion by 2025/26.
In its 2015 election manifesto the Conservative party pledged to extend the triple lock until 2020. However in June, the former prime minister David Cameron warned that the triple lock could be put under review in the event of a Brexit.
One issue relating to the triple lock is that the inflation and average earnings measure might not actually reflect the real increase in costs experienced by pensioners, particularly those on the lowest incomes.
Andrew Pennie, head of pathways at Intelligent Pensions says: "Given that inflation and growth in average earnings could become negative, we believe a double lock would be unacceptable and perhaps the triple lock can remain, and is in fact necessary, provided the 2.5% escalation rate is reviewed and better reflects current economic conditions.
"Food and utility bills will clearly dominate the expenditure of a low income pensioner and a more relevant and appropriate measure of pensioner inflation is needed or perhaps that’s how the third element of the triple lock needs to operate to ensure a more efficient and effective means of protecting long term state pension incomes."
'Triple lock was never going to be sustainable'
Tom McPhail, head of retirement policy at Hargreaves Lansdown says: "The triple lock was never going to be sustainable in the long term and for as long as it exists, it will divert an ever increasing share of government spending towards pensioners, at the expense of the working population. A balance always needs to be struck between protecting the standard of living of pensioners, and not over-burdening taxpayers. There is a strong case for using a dedicated pensioners' RPI measure for inflation-proofing the state pension, rather than either a triple lock, or the double lock proposed by Ros."
The gap between the incomes of pensioners and workers has narrowed substantially over the last 20 years, according to the Office for National Statistics (ONS). In 1994/95 pensioners typically lived on an income that was 38% less than the typical worker, but by 2014/15 this gap had reduced to just 7%.
A new 'flat rate' state pension was introduced for people reaching retirement age on or after 6 April that will pay a maximum £155.65 a week, depending on your National Insurance Contribution record - that's just over £8,000 a year. Those who retired before this date get a mixture of basic and additional state pension that could give them a higher income.
However, Moneywise research found that more than half of people (55%) don't understand how the new state pension works.
The state pension age is also gradually being pushed back to reflect the fact that we're living longer. Women's state pension age will level off with men at 65 by 2018. They will then start rising together to 66 by 2020 and to 69 at some point in the 2040s.
Plus, next year sees a long-scheduled review of state pension ages. Mr McPhail says: "There is an argument for raising state pension age faster, modifying the triple lock and at the same time further increasing the level of the state pension. The new single tier state pension is worth around £8,000 a year; if this could be pushed up nearer to £10,000 a year, then having to wait a couple more years to receive it and sacrificing the triple lock might be acceptable compromises."
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.