Ros Altmann: How I would reform pensions - and get ride of ‘triple lock’

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IT is vital that the UK Government protects pensioner incomes and ensures pensioners are treated fairly.

It is also essential that the State Pension system is affordable, sustainable and works fairly for older and younger generations. Currently, the Government has committed to a policy that will ensure the state pension rises each year by the highest of price inflation, average earnings or 2.5 per cent - the so-called ‘triple lock’. This has increased the State Pension considerably since 2010.

Since 2010, pensioner incomes have been boosted significantly: Leaving pensioners in poverty is unacceptable, yet until a few years ago that was the fate of too many or our country’s elderly people. In 2008, the Basic State Pension had sunk to the lowest level relative to average earnings for decades. However, since 2010, the incomes of our 13 million pensioners have been boosted, and pensioner incomes are more than £10 a week higher now than they would have been if the state pension had only been linked to average earnings. Indeed pensioner households are no more likely to be poor than other age groups in today’s Britain.

Triple lock has probably fulfilled its purpose: I believe the triple lock has fulfilled its purpose and suggested, as Pensions Minister, that the next Parliament needs to secure those gains, but a triple lock is not necessary for that any more. In fact, in some ways, having the triple lock has been used as an easy symbol for politicians to point at to claim they are looking after pensioners. This can sometimes mean they do not believe they need to engage in more serious and in-depth policymaking for the ageing population. Such totemic symbols may be politically convenient, but are not a sound substitute for carefully considered policy reform.

Must still protect pensioner incomes with a ‘double lock’: In fact, keeping the triple lock construct beyond the current commitment to 2020 makes little sense to me. Together with the new State Pension which started from April 2016, the income of existing and new pensioners is now well above historic norms. It is absolutely right that we protect pensioner incomes, but a ‘double lock’ - with state pension being increased by the higher of the rise in average earnings or inflation - could still achieve that important aim from 2020. By committing to a ‘double lock’, rather than the triple lock, and dropping the promise of increasing state pensions by at least 2.5 per cent even if earnings and prices rise by far less than that, the Government is forecast to save billions of pounds on long-term pension costs.

Triple lock not needed for the long-term: A Report produced by the Government Actuary’s Department (GAD) last year (published but then hastily withdrawn one day later!) suggested that the cost of the triple lock has been about £6bn a year. The GAD said the cost of the triple lock could well be ‘materially higher’ in future, especially if earnings and price inflation stay low for a longer time. On its most likely scenarios, keeping the triple lock could add around 10 per cent to spending on state pensions by 2040, but in a deflationary scenario the costs would be significantly more - potentially more than double the cost of just linking to earnings by 2070. By moving to a double lock, billions of pounds could be saved in future pension spending

Brave political decisions are needed for good policy-making: So I had recommended that the Government should take the brave decision (brave politically, rather than in pure policy terms) to announce that it is considering moving to a double lock from 2020 onwards, as a way of ensuring fairness between generations and managing the ongoing costs of state pension age increases.

A double lock from 2020 is better policy and could prevent need to continue increasing state pension age: If pensioner household incomes have already reached levels that mean they are no worse of, on average, than younger families, then it is harder to justify continuing to boost them even further beyond this level and the right thing to do is to just commit to ensure they are protected properly each year relative to the rest of the population and the economy as a whole. If money is saved by using a double lock, this could offset the need to keep increasing state pension age. Reducing the annual uprating can save more money than increasing state pension age itself.

Triple lock is totemic political construct that has long-term dangers: The triple lock is a classic example of a political policy decision that is in danger of outlasting its purpose because politicians fear taking difficult decisions. It has also been a useful policy for easily asserting that pensioners are being protected, without carefully considering the long-term as well as the short-term implications and inter-generational aspects.

Political courage in the interests of sensible policy: Keeping commitment to 2.5 per cent rise for ever makes no sense in terms of sound policy: A double lock is much easier to justify than a triple lock policy. If our new Government is brave enough, there is an opportunity to signal sensible thinking on pensions policy and recognise that the triple lock has achieved its purpose and now to consolidate and protect pensioners we can move to a double lock instead for the future beyond 2020.

Baroness Ros Altmann is the former Pensions Minister.