Triple bind: Cost of state pension set to be three times higher than predicted
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The triple lock will cost £15.5bn a year in 2029-30, three times as much as the £5.2bn originally projected because of higher inflation and earnings volatility, the Office for Budget Responsibility has said.
As well as a potentially marked increase in the cost of the state pension, the independent forecasters warned of other risks arising from pensions, such as undersaving among groups like the self-employed and private renters, and a decline in demand for gilts from defined benefit schemes pushing up the UK’s borrowing costs, in its latest ‘Fiscal risks and sustainability’ report published on Tuesday.
The state pension is the government’s second-biggest spending item, eclipsed only by the NHS.
In 2012, the coalition government introduced a so-called ‘triple lock’ for uprating the state pension by the highest of earnings, CPI or 2.5%. At the time it was estimated the increases would average 0.2 percentage points above earnings growth, costing the taxpayer about £5.2bn by 2029-30.
However, “due to inflation and earnings volatility over its first two decades in operation, the triple lock has cost around three times more than initial expectations”, the OBR writes, expecting it to have cost £15.5bn annually by 2029-30.
“The OBR's analysis makes a lot of the same conclusions we have also made in previous analysis - the triple lock has so far been much costlier than initially expected, and it creates a lot of uncertainty in terms of future spending,” said senior research economist at the thinktank, Heidi Karjalainen.
“This uncertainty is the key issue with the triple lock – if the economy is doing well then it won't cost anything beyond average earnings growth, whereas in volatile periods it can become very costly," she added.
In 2023, the Institute for Fiscal Studies proposed putting in place a target for the state pension expressed as a proportion of average earnings. It suggested a smoothed earnings link similar to that applied in Australia, where the link temporarily shifts to inflation when this exceeds earnings until the target is met.
While the IFS thinks a target replacement ratio is needed, Karjalainen said the IFS recognises that keeping the triple lock was a manifesto commitment but thinks the path for future policy change could be cleared now.
“What the government could do during this parliament is set a target level for the state pension as a share of average earnings for the next parliament, keeping triple lock in place until we get to that target, and committing to move to a smoothed earnings link once that target is met,” she suggested.
Steven Cameron, pensions director at provider Aegon, said the triple lock has been valuable in recent years amid big fluctuations in inflation and earnings growth.
“However, as we look to the future, there’s an increasingly urgent need for discussion on how the triple lock might be refined to maintain its core aims, while ensuring it remains affordable,” he said.
Aegon has suggested a smoothing mechanism where pensioners would receive an inflation increase as a minimum but could receive an additional uplift if average wage growth has been higher than inflation over the previous three years.
“This would protect pensioner purchasing power and make future costs to today’s taxpayers less unpredictable,” Cameron argued.
He warned that any hint of changes to the state pension triple lock would come with huge political risks.
“But as the financial consequences of retaining it in its current form become clearer, all political parties should face up to the need for responsible change. Ultimately, having a sustainable and affordable approach to state pension upratings is in everyone’s interests,” he said.
The OBR’s central scenario has state pension spending go up from 5% of GDP in 2024-25 to about 7.7% by the early 2070s. However, an environment like that seen over the past two decades would push this figure even higher.
“If this heightened volatility in inflation and earnings were to persist over the next fifty years, this could add an additional 1.5 per cent of GDP (£43 billion in 2024-25 terms) to state pension spending by the early 2070s,” the report notes.
The triple lock policy is popular among the voting public. Last year, a survey by Pensions UK, then the Pensions and Lifetime Savings Association, found that 73% of 2,100 people – including 1,588 who were not yet retired – felt the triple lock should be maintained.
Keen not to disappoint this sentiment, the main political parties have repeatedly committed to keeping the triple lock in place, despite its high cost and the fact that pensioners are now the wealthiest age group, as the policy has helped to bring down pensioner poverty as poverty levels have increased in other age groups.
However, given the outcry and subsequent U-turn over the means-testing of the winter fuel payment, the government will be wary of angering the grey vote further while polls show Reform UK is gaining popularity.
As well as a potentially marked increase in the cost of the state pension, the independent forecasters warned of other risks arising from pensions, such as undersaving among groups like the self-employed and private renters, and a decline in demand for gilts from defined benefit schemes pushing up the UK’s borrowing costs, in its latest ‘Fiscal risks and sustainability’ report published on Tuesday.
The state pension is the government’s second-biggest spending item, eclipsed only by the NHS.
In 2012, the coalition government introduced a so-called ‘triple lock’ for uprating the state pension by the highest of earnings, CPI or 2.5%. At the time it was estimated the increases would average 0.2 percentage points above earnings growth, costing the taxpayer about £5.2bn by 2029-30.
However, “due to inflation and earnings volatility over its first two decades in operation, the triple lock has cost around three times more than initial expectations”, the OBR writes, expecting it to have cost £15.5bn annually by 2029-30.
“The OBR's analysis makes a lot of the same conclusions we have also made in previous analysis - the triple lock has so far been much costlier than initially expected, and it creates a lot of uncertainty in terms of future spending,” said senior research economist at the thinktank, Heidi Karjalainen.
“This uncertainty is the key issue with the triple lock – if the economy is doing well then it won't cost anything beyond average earnings growth, whereas in volatile periods it can become very costly," she added.
In 2023, the Institute for Fiscal Studies proposed putting in place a target for the state pension expressed as a proportion of average earnings. It suggested a smoothed earnings link similar to that applied in Australia, where the link temporarily shifts to inflation when this exceeds earnings until the target is met.
While the IFS thinks a target replacement ratio is needed, Karjalainen said the IFS recognises that keeping the triple lock was a manifesto commitment but thinks the path for future policy change could be cleared now.
“What the government could do during this parliament is set a target level for the state pension as a share of average earnings for the next parliament, keeping triple lock in place until we get to that target, and committing to move to a smoothed earnings link once that target is met,” she suggested.
Steven Cameron, pensions director at provider Aegon, said the triple lock has been valuable in recent years amid big fluctuations in inflation and earnings growth.
“However, as we look to the future, there’s an increasingly urgent need for discussion on how the triple lock might be refined to maintain its core aims, while ensuring it remains affordable,” he said.
Aegon has suggested a smoothing mechanism where pensioners would receive an inflation increase as a minimum but could receive an additional uplift if average wage growth has been higher than inflation over the previous three years.
“This would protect pensioner purchasing power and make future costs to today’s taxpayers less unpredictable,” Cameron argued.
He warned that any hint of changes to the state pension triple lock would come with huge political risks.
“But as the financial consequences of retaining it in its current form become clearer, all political parties should face up to the need for responsible change. Ultimately, having a sustainable and affordable approach to state pension upratings is in everyone’s interests,” he said.
The OBR’s central scenario has state pension spending go up from 5% of GDP in 2024-25 to about 7.7% by the early 2070s. However, an environment like that seen over the past two decades would push this figure even higher.
“If this heightened volatility in inflation and earnings were to persist over the next fifty years, this could add an additional 1.5 per cent of GDP (£43 billion in 2024-25 terms) to state pension spending by the early 2070s,” the report notes.
The triple lock policy is popular among the voting public. Last year, a survey by Pensions UK, then the Pensions and Lifetime Savings Association, found that 73% of 2,100 people – including 1,588 who were not yet retired – felt the triple lock should be maintained.
Keen not to disappoint this sentiment, the main political parties have repeatedly committed to keeping the triple lock in place, despite its high cost and the fact that pensioners are now the wealthiest age group, as the policy has helped to bring down pensioner poverty as poverty levels have increased in other age groups.
However, given the outcry and subsequent U-turn over the means-testing of the winter fuel payment, the government will be wary of angering the grey vote further while polls show Reform UK is gaining popularity.
