What You Need To Know
Triple Lock Guarantee on State Pension Temporarily Scrapped for a Year

An economic recession is the inevitable result of high inflation, even higher interest rates, and the depletion of available jobs.

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Money (illustration)
Money (illustration)
photo: iStock

An economic recession is the inevitable result of high inflation, even higher interest rates, and the depletion of available jobs. In such a situation, several vulnerable people groups exist that require care from their local governments. One such group in the UK is the pensioners, who receive protection through a legal requirement that ensures that pensions rise every year.

The formula for the yearly increase in pensions involves tying the pension increase amount to escalating costs of living, earnings growth, or 2.5% – whichever figure is higher. The Conservative-Liberal Democratic Coalition proposed this Triple Lock Pension Guarantee to help preserve pensioners’ incomes.

Though meant to remain in place until at least 2024, policymakers will most likely remove this expensive guarantee as earnings have recently experienced an uncharacteristically high increase. The cause of this is a significant portion of the working population returning to regular employment. The Government’s coronavirus furlough scheme has contributed to this trend too. According to the Office for Budget Responsibility, earnings have risen to over 8% since the coronavirus lockdown ended.

Ordinarily, the triple-locked State Pension would positively reflect this increase. For 2022, pensioners could reasonably expect to add a record-breaking additional £880 a year to their incomes, which works out to roughly the equivalent of £14.37 per week. The multi-faceted changes wrought by the pandemic make it imperative to understand what these changes mean for your pension payments.

The Government appears to be bracing itself for the effects of higher earnings. It will mean, amongst other things, making necessary adjustments to pensions in the national Budget. The phenomenon of higher earnings in a post-lockdown context has highlighted how urgent it is for the Government to reconsider the pension guarantee.

A potential replacement for the triple lock system could be what is known as a ‘double lock.’ Instead of pegging pensions against earnings, inflation, or 2.5%, the annual pensions increase would be adjusted to rise along with inflation or the guaranteed minimum of 2.5% only. According to Work and Pensions Secretary Therese Coffey, a double lock would prevent pensioners from reaping unearned rewards from a “statistical anomaly.” Keeping the triple lock in place would be very unfair to the employed portion of the population. But if the Government carefully considers the financial situation of both pensioners and taxpayers, enacting the double lock system could yield savings of up to £5 billion for the Government while keeping a good deal of the populace satisfied.

Since its inception, the triple lock system has been a contentious issue. Former Pensions Minister and Lib Dem MP Steve Webb observed that the Treasury opposed the triple lock from the moment the issue was first tabled. Pensions have never been an inexpensive item on any government’s national balance sheet, and the triple lock proves how very true this is.

Citizens who are already enjoying the benefits of having a full State Pension are the ones who tend to be in favour of the triple lock. The policy has helped increase the value of the State Pension over the last few decades.

Less favourable responses to the system come from those who are currently working. Watching the Government make seemingly reckless changes to their campaign promises is causing some employed folk to wonder if the pension system will still be functional when it is their turn to retire. Other people feel forced to work well past their retirement age because their pensions are insufficient. After paying faithfully into their National Insurance accounts for decades, they feel poorly treated by the Government. To be met at the end of one’s working life with the news that your pension has decreased in value is not pleasant at all.

Once the pandemic is over and recovery appears to be within reach, it would boost public morale if the Government brought back the triple lock system. Women, in particular, need the triple lock as they tend to have smaller private pensions, leading to a higher reliance on the state-provided pensions. Also, as fewer companies offer pension plans these days, returning the pension system to its triple lock format would benefit working persons. These people will come to rely more and more on the State Pension.

To take it one step further, the British Government could stand to sharpen its pension policy. Amongst its European counterparts, the UK ranks low in terms of pension generosity. As the annual pension review comes around, one can empathize with the difficult decisions the Government has to make. The public will be waiting with bated breath for the autumn announcement of 2022 pension rates.

In sum, making the change from a triple lock pensions system to a double lock pensions system could yield anywhere between £3 and £5 billion for the British Government. There will be a period of belt-tightening for taxpayers and retirees, but this period is set to end after one year.

The savings could go a long way towards alleviating the consequences of COVID-19 on the economy. COVID has cost the country a whopping £299 billion so far. Enforcing a double lock would be of national benefit to the UK as it seeks to recover from the life-changing effects of the pandemic.