A full State Pension might well be worth north of £10,000 a year if the “triple lock” is applied from next April – an important and often vital component of many people’s retirement income. But is the ground being prepared by the Treasury for a lower cost alternative…? By Tony Watts OBE

Covid has had some distorting effects upon many aspects of our economy, but one that few people saw coming in the earlier stages of the pandemic was the startling impact it might make upon the Government’s triple-lock pledge on pensions. Average incomes stopped plummeting once lockdown ended: furlough ended for many and companies who had laid staff off rehired… and earnings have consequently soared by around 8%.

That doesn’t mean that everyone is eight per cent better off on average than before Covid kicked off… simply that the blip has been (in part at least) clawed back.

But as average earnings represent one of the three components of the triple lock pledge, the Government is in a bind: do they fork out an 8% hike in the State Pension or be seen to renege on their manifesto promise and face the wrath of a sizeable chunk of the nation’s voters?

While our populist PM would obviously prefer not to invoke the latter, our Chancellor has his gimlet eye on public spending and this is one area where the two may well be finding common ground to disagree at present.

Cognisant of the potential political fall-out, Tory MPs have apparently been canvassed for their take, and recently-ensconced “Red Wall” MPs will be particularly concerned as many of their constituents will be relatively dependent on the State Pension in their retirement years compared to those in the leafier shires.

A brief history…

Those with longer memories will recall that the triple lock pledge was brought in by the Coalition administration after many years of campaigning by pensioner groups following the removal of the link between the State Pension and average earnings early on in Mrs Thatcher’s first Government.

Several decades passed, during which time those dependent or heavily reliant upon the State Pension found themselves losing ground with the rest of society. The Labour Governments which followed declined to restore the link but instead brought in or boosted a number of other benefits intended to help those at the lower end of the income scale… although as many of these were not means tested, some (including the Winter Fuel Allowance) are now bones of contention.

It’s no coincidence that – despite the pledge – the UK State Pension remains one of the least generous amongst developed nations. And that’s before you take into account those getting by on the old State Pension; or not, for a variety of reasons, receiving the full new one.

However, an 8% rise when most people have had a difficult 18 months is still problematic. Moreover, the issue is also one where stark generational battle lines are being drawn up. Not least because increasing NI contributions could be one way to fund the rise… and younger workers will be footing a chunk of the bill but not seeing (at least for some time!) the benefits.

Mind the (generation) gap

In fact, a recent Canada Life survey of 2,000 people has reinforced this. While 46% of UK adults say the Government should maintain the triple lock promise, almost 6 in 10 (59%) over 50s are supportive of maintaining it compared to around a third (34%) of those under 50.

Interestingly, 16% support a move to “double lock” which would see the state pension increase by the higher of 2.5% and inflation – taking average earnings out of the equation. Even fewer people (14%) supported the idea of finding a compromise to use a lower earnings figure with the furlough impact stripped out. Almost a quarter (23%) of respondents said they were unsure or uninterested in the decision.

As Andrew Tully, technical director at Canada Life said on the survey: “The Government has a difficult path to navigate, to ensure the state pension remains affordable in what is a difficult time for the nation’s finances, while also bearing in mind its manifesto commitments. It’s important to remember that each 1% rise in state pension costs the taxpayer around £850m a year.”

One option, as he goes on to point out, could be to strip out the artificial earnings growth from the data, making it more representative of the real underlying growth in earnings.

Ultimately, the decision will be political, but either way expect this to be an issue that will grab some big headlines in the months to come and also rear its head at the next election when all of the parties will be expected to state their position on the pledge… and stick to it should they get elected.