The Tories will axe the ‘triple lock’ guarantee from 2020, meaning older people could eventually get smaller annual state pension rises if Theresa May wins the election.
The Conservative Party would switch to ‘double lock’ increases in three years’ time, so the state pension would no longer rise by a minimum of 2.5 per cent each year, but by whichever is the highest of inflation or annual earnings growth.
Labour and the Liberal Democrats have promised to keep the triple lock for the whole of the next parliament. But the newly-released Conservative manifesto says: ‘We will keep our promise to maintain the Triple Lock until 2020, and when it expires we will introduce a new Double Lock.
Triple lock: Annual rises in state pension are currently decided by whatever is the highest of price inflation, average earnings growth or 2.5%
It adds: ‘We will also ensure that the state pension age reflects increases in life expectancy, while protecting each generation fairly.’
The Government has faced mounting pressure to scrap the triple lock guarantee on the grounds it is too costly to keep giving pensioners earnings and inflation-busting rises in income every year.
Pensioners could still get more than the current 2.5 per cent minimum increase under a double lock. However, it would keep future state pension rises in line with the price or earnings growth experienced by everyone else, rather than often running ahead as in recent low inflation and wage growth years.
Yet, if the Tories win the election and stick determinedly to a double lock after 2020, they could risk a repeat of Labour’s highly unpopular 75p annual state pension rise, if both earnings and inflation were subdued.
Steven Cameron, pensions director at Aegon, says: ‘The Conservative manifesto can’t be accused of bribing the grey vote at the expense of the working age population.
‘Pensioners face tough measures as we face the growing costs of an ageing population and intergenerational trends which have seen pensioners incomes rise to just 7 per cent lower than those of the working population on some measures.
‘The dropping of the state pension triple lock from 2020 will apply equally across all pensioners, but dropping the 2.5 per cent will only lead to less generous increases in the unlikely event that both earnings and price inflation fall below this in future years.
‘But a continued link to national average earnings does mean pensioners benefit where a stronger economy leads to greater earnings for the working population.’
‘The move to means test the winter fuel payment will mean some will lose up to £300 a year. The threshold, and whether based on income or assets, will be of interest.
‘A new approach to social care funding is long overdue and the Conservative proposals will be contentious. Compared to the current system, pensioners needing residential care will benefit from being allowed to keep £100,000 rather than the current £23,250.
‘This will be particularly welcomed by those with relatively modest assets in later life. But previous proposals to cap total ‘eligible care’ contributions at £72,000 would have offered far greater protection to those whose assets are well above £100,000.’
Tom Selby, senior analyst at AJ Bell, says: ‘The state pension triple lock has become deeply politicised ahead of the election. The Conservatives have had it in their cross hairs for a while now, whereas Labour and the Lib Dems have committed to keeping it.
‘The bottom line is that the triple lock is an expensive policy and Theresa May has clearly sounded its death knell. Office for Budget Responsibility projections suggest retaining the triple-lock could cost £15billion more than earnings indexation by 2060.
‘A double lock of inflation or earnings after 2020 will still ensure the state pension at least increases in line with the cost of living.
‘The reversal of the plans to put a £72,000 cap on social care costs means more people will have to pay more for long term care.
‘The proposed £100,000 capital floor below which assets will be protected will include people’s houses and we are a nation of homeowners. This means large numbers of people are going to have to make their own arrangements to fund long term care or defer payment until their death.’
Triple lock is forecast to increase state pension by more than either inflation or earnings growth
Looking ahead: How might the triple lock boost the state pension compared to inflation or average earnings growth over the next few years (Source: Fidelity International)
How much is the state pension compared with earnings?
Has the triple lock worked?
Economists like to measure the state pension by how much of the nation’s average income it replaces, and on that measure the value is now up to its highest share of average earnings since April 1988, writes Simon Lambert.
An IFS report earlier this year calculated that between April 2010 and April 2016 the value of the state pension increased by 22.2 per cent, compared to 7.6 per cent earnings growth and a 12.3 per cent rise in consumer prices.
But while it has achieved the aim of lifting pension income, the triple lock costs money. The IFS calculates that by 2016, it cost an extra £6billion annually compared to raising pension payouts with earnings and £4billion compared to doing it with CPI inflation.
To put that into context, this year’s Office of Budget Responsibility Budget document put state pension spending at £89.4billion in 2015 to 2016 – so the triple lock effect accounts for about 7 per cent of that.
The magic of compounding means that over the long-term that cost will swell, as OBR figures forecasting a rise to £15billion show. Yet, that needs some context too, as with the triple lock we are expected to spend 6.8 per cent on national income on state pensions in 2060, compared to 6 per cent without it.
The upside of this is more money for pensioners, the downside is that the IFS reckons it means that we have to retire later – without it a state pension age of 69 in 2050 could be 67½.
Carl Emmerson, of the IFS, says in that report: ‘Of course it is not unreasonable to argue that the state pension should be made more generous (though it is should be remembered that – as IFS research has shown – pensioners are no longer a particularly poor group in society).
‘But if the government wants to increase the level of the state pension relative to earnings, it should choose the level it wants (and potentially a path to get there) rather than allowing the somewhat haphazard increases relative to earnings that result from the triple lock.’