Double lock shift strikes 'right balance'; long-term reforms still needed

Industry experts have labelled the government’s decision to suspend the triple lock as the "the right balance” amid the impact of the pandemic, although concerns have emerged around the need for long-term reforms and the potential precedent set.

The removal of the earnings link element of the state pension triple lock for 2022/23 was announced yesterday, amid growing pressure for the government to take action after the impact of the pandemic raised questions over its affordability.

LCP partner, Steve Webb, described the government decision as “understandable” in light of the spike in earnings figures, stating that it was “very welcome” that the government has recommitted to the policy for future years.

“The UK state pension remains relatively low by international standards and many women in particular depend on the state pension for a large part of their income in retirement,” he said.

“To relax the rules on a one-off basis because of the distortions caused by the pandemic but to reinstate the policy for future years strikes the right balance”.

This was echoed by Pensions Management Institute (PMI) director of policy and external affairs, Tim Middleton, who suggested that the temporary move to a ‘double lock’ should be regarded as “an acceptance of the inevitable”.

“Time will tell if the planned restoration of the earnings-related element will indeed actually happen,” he added. “However, all those who remain passionate about pensions will remain committed to further development of our system to ensure that the retired are guaranteed a secure and comfortable lifestyle.”

Indeed, industry experts have emphasised the need for the government to keep its commitment to return to the triple lock, as Interactive Investor head of pensions and savings, Becky O’Connor, explained that “the earnings measure, in normal times, helps to ensure pensioner incomes do not fall below those of the rest of the population.”

Hymans Robertson partner, Chris Noon, also praised the government decision not to “abandon the triple lock completely”, stating: “The UK already has one of the worst state pensions across the OECD. Throwing out the triple lock would have risked pushing more pensioners in to poverty.”

Furthermore, whilst Royal London consumer finance specialist, Sarah Pennells, raised concerns that women and the self-employed will be “particularly affected” by the change, she agreed that it is therefore "encouraging" that the government has not abandoned its longer-term commitment.

However, there were concerns as to how the news will be received by savers, as Canada life technical director, Andrew Tully, noted that whilst the government has been walking a “difficult tight rope”, Canada Life research has shown that only 16 per cent of adults support removing the earnings-linked guarantee.

Alongside this, AJ Bell has published the findings of recent research, which revealed that just 8 per cent of people support any change to the triple lock, although AJ Bell senior analyst, Tom Selby, suggested that “it is possible this particular piece of bad news will be largely buried by the national insurance hike announced earlier today”.

Selby also clarified that the cost of the state pension triple lock "risked ballooning if, as expected, average wages come in at 8 per cent or higher for the three months to July".

He continued: "The Office for Budget Responsibility estimates every 1 percentage point increase in the state pension costs the Treasury about £900m.

"This would imply a cost of £7.2bn compared to freezing the state pension at the current level, versus a £2.25bn cost if it is uprated by 2.5 per cent.”

Aegon pensions director, Steven Cameron, also agreed that some adjustment was “inevitable and only fair”, arguing that to place this burden on working age earnings alongside the national insurance contribution increases would have represented a “double whammy hit to take-home pay”.

Echoing this, Hargreaves Lansdown senior pension and retirement analyst, Helen Morrissey, acknowledged that whilst the move will “no doubt disappoint pensioners” who could have been in line for an 8 per cent increase, “any solution needs to be fair to pensioners and taxpayers alike.”

“This along with the announcement that working pensioners will contribute to the Health and Social Care levy shows the burden does not solely fall on younger workers,” she continued.

However, Morrissey also suggested that the time has come to look at whether the triple lock is fit for purpose and remains the best way to preserve the long-term value of the state pension.

The concerns were echoed by The Investing and Saving Alliance (Tisa) head of retirement, Renny Biggins, who suggested that while the economic impact of the pandemic could not have easily been predicted, it has highlighted "several areas where policy clearly needs review".

He stated: “The pensions triple lock falls into this category, and recent events have thrown the unintended flaws in the triple lock formula into stark relief. It should not be so visibly skewed, either positively or negatively, by outsized fluctuations in one of its parameters.

“A one-year suspension is a reasonable, short-term solution to a disproportionate outcome. However, longer term, there is a clear need for a formula that guards against such short-term distortions while maintaining a long-term rise in the state pension in real terms, adjusting for inflation.”

The Institute and Faculty of Actuaries president, Louise Pryor also agreed that the temporary change “should not divert attention away from the need for a longer-term reform to embed fairness for all generations”.

“Irrespective of immediate measures to address Covid-19 anomalies, it remains crucial as today’s workers become tomorrow’s pensioners, that the state pension remains fair and sustainable over the long term,” she said.

Aside from the impact on pension savers, industry spokespeople have warned that whilst the reduction to a double lock was “widely predicted” it does represent a break in manifesto commitments, and could set a precedent for future broken promises.

Aries Insight co-founder, Ian Neale, commented: “It prises open something hitherto accepted as sacrosanct, making it easier to repeat the action of amendment if in future inflation should double, for example. The power of precedent should not be underestimated.

“The precedent is a double-edged sword for politicians, however. In this instance, government credibility with the electorate has been damaged: pensioners will feel less trusting at future elections, and the over-66s represent a growing proportion of the electorate.”

Furthermore, Fidelity International investment director, Maike Currie, noted that whilst the government has avoided scrapping the manifesto commitment completely by using a temporary change to the triple lock, more changes could be on the way.

“This is just the start of the UK government tightening its belt as it gears up to pay for the cost of the Covid-19 pandemic, and nothing - not even manifesto promises - are off limits," she concluded.

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