The pension triple lock refers to the guarantee that the State Pension will increase each year. This was introduced in 2010 by the then Conservative-Liberal Democrat government.
Since the introduction, the State Pension has increased each year by whichever is highest out of the below three measures, hence the term ‘triple lock’:
- Annual price inflation in September
- Average earnings growth as of July
As a result, retirees over the last decade have experienced their State Pension increasing by a minimum of 2.5% each tax year. In fact, in many cases, the State Pension has increased by more than 2.5%. The table below shows which one of the triple lock has been used in each year since 2012.
The triple lock guarantee helps to preserve and increase income in real terms.
What’s the Issue?
Wage growth was negative in 2020 but earnings have bounce-backed sharply this year with the winding down of the furlough scheme as the economy re-opens.
The latest figures from the Office for National Statistics (ONS) showed earnings increased by 7.3% in the three months to May 2021, up from 5.6% last month.
It suggested they could increase even further over the coming months before the final reading is taken in September.
The Office for Budget Responsibility (OBR) has forecast that earnings growth could rise to 8% in the next two months.
This resurgence in wage growth will have a dramatic impact on state pension uprating if the chancellor maintains the triple lock in its current form.
It is suggested that that a 7.3% uprating will cost the government an additional £6.7bn in 2022/23.
What are the next steps?
There are discussions at government level happening to review the triple lock. Options they are considering include:
- Removing the triple lock entirely
- Moving it to a double lock by removing the link to earnings growth
- Using an average for earnings growth – The chancellor has said there must be fairness between taxpayers and pensioners in setting the state pension increase, and one way this could be achieved is by basing the earnings-growth element on a three-year rolling average figure.
Ultimately, debates around the triple lock often get linked to the overall level of the state pension but that is another matter entirely. Tweaking the triple lock doesn’t mean a state pension cut. This is about how it maintains its value fairly over time.
We’ll know later in the year when the decision about the April 2022 increase will be announced.