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Triple-lock pension under threat from COVID-19

Updated 23 April 2020

Nick Green
Financial Journalist

The coronavirus lockdown poses a major threat to the world economy. A think tank has suggested that now is the right time for the UK to abandon the triple lock on the state pension, thereby saving £4bn a year. Could it happen? Article by Nick Green.

Coronavirus threatens state pension triple lock

The huge cost of the coronavirus crisis should be shared fairly across the UK population, between working people and retirees alike. This at any rate is the argument of the Social Market Foundation (SMF), an independent public policy think tank. In their briefing paper ‘Intergenerational fairness in the coronavirus economy’, they argue that the aftermath of COVID-19 is likely to see a new round of austerity – and that this ‘Austerity Round Two’ should not fall predominantly on the working-age population, as Austerity Round One did. Specifically, the SMF claims that continuing to maintain the state pension triple lock – whereby state pension increases often beat inflation – would be unfair, given the economic sacrifices that younger generations will be forced to make.

‘Prepare to make sacrifices’

The paper’s author, research director Scott Corfe, observes how the crisis has highlighted the importance of a society pulling together and looking out for one another. He says, ‘Amid such gloomy times … perhaps we should take cheer in the fact that society, far from being on its last legs, seems alive and well. We have come together as a nation to protect our elderly and vulnerable, even though that means a loss of income and jobs. In a good society, people are prepared to make sacrifices to ensure the wellbeing of others.’

The unavoidable implication is that these ‘sacrifices’ are expected to cut both ways. The paper argues that since younger Brits have put their careers and businesses on hold to protect (predominantly) the older generation, that this generation will want to return the favour by absorbing some of the economic impact. The SMF has singled out the state pension triple lock as a prime target area where significant savings could be made.

What is the state pension triple lock?

Introduced in 2010, the triple lock is a guarantee that the state pension will not lose value in real terms, by increasing in line with inflation or wages (whichever rise is higher) or at a minimum of 2.5 per cent annually. As it turns out, the 2.5 per cent figure has consistently outstripped both inflation and wage growth over the decade, meaning that pensioners as a group have enjoyed higher percentage ‘pay rises’ than most workers.

The obvious caveat here is that the UK state pension is still relatively small (only £9,110.40 a year in 2020/21) and not enough for a person to live on comfortably without private pension savings. So pensioners haven’t exactly been living extravagantly at their children’s expense. Nevertheless, the SMF argues that a less expensive ‘double lock’ would still protect pensioners’ income from inflation, while saving the UK billions every year – and preventing accusations that the young are picking up the coronavirus tab.

What is the ‘double lock’ that the SMF is proposing?

The SMF’s central argument is that ‘a triple lock ensuring a 2.5 per cent minimum rise in pensions would constitute enormous generosity to pensioners, at a time when working-age adults face low or no wage growth and significant unemployment’. The suggested alternative is simply to keep the other two protections, ensuring that the state pension continues to rise in line with either wage growth or the Consumer Prices Index (CPI), whichever is higher.

The SMF estimates that this measure would save £20 billion over five years, and that these savings would help the UK economy recover from the impact of the coronavirus pandemic.

Scott says, ‘Quite rightly, society is making sacrifices to protect its elderly right now. There is a clear case for intergenerational reciprocation when it comes to meeting the fiscal costs of the crisis.’

Can pensioners afford only a double lock?

Losing the triple lock would not have an immediate impact on the state pension, since it affects only yearly increases. No-one would suddenly start to receive less state pension than they do now. Any change in pensioners’ relative income would happen gradually, over a number of years.

If the government does remove the triple lock, and assuming it moves to a double lock, the state pension would still rise to prevent it losing value in real terms, though the increases would no longer outstrip inflation. A less favourable scenario might be if the government decides on only a single lock, with pensions rising either in line with wages or prices, but not both. Over time, this might eventually reduce pensioners’ buying power (though not necessarily).

Perhaps ironically, the effects of removing the triple lock might not be felt so much by the generation currently retired, but by those due to retire over the next 10 to 20 years. Whether this rather undermines the SMF’s case for ‘intergenerational fairness’ is a matter for debate.

What can I do to safeguard my retirement income?

If you are already retired and receiving the state pension, there may not be a huge amount you can do about the loss of the triple lock (that’s if it happens). The good news is that, as explained above, it should have less effect on you than on the generations yet to retire. Your state pension income will not decrease, and in fact will continue to rise annually (just more slowly than before).

If you are due to reach state pension age within the next decade, now may be a good time to take stock of your private pension arrangements and think about how you will inflation-proof your pension income. It is possible to purchase annuities (guaranteed income products) that pay increasing amounts year-on-year, which can be a good defence against rising prices over the length of a retirement (which may be 20 years or more). It’s good to start thinking about options like these several years in advance, so you can prep your pension fund to be best-placed to achieve them. Talk to a financial adviser who can help you get ready.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.