Uniform political support for a triple-lock on state pensions does not reflect a flawed policy that could cost the Exchequer £15bn a year, according to experts.
All of the major parties backed the triple-lock in the build up to the election and the policy is therefore likely to continue following the Conservatives’ victory last week.
In their manifesto, the Tories pledged to maintain the policy installed under former Liberal Democrat pensions minister Steve Webb until at least 2020.
Webb had hoped to install the triple-lock in legislation to maintain the increases in perpetuity. However, Conservatives have proved less willing to commit long-term, backing the policy only for the duration of the parliament.
Nonetheless, the support from David Cameron’s party means that state pensions will rise by whichever is highest of inflation, wages or 2.5 per cent for the next five years.
JLT chief executive Mark Wood argues the policy remains an essentially unfunded promise because no-one can say with any certainty how much it will cost.
He says: “It’s an institutionalised version of quantitative easing, in that it’s a recycling of tax revenues into consumption and so buoys the economy.
“So there’s a legitimate justification for pay as you go, but the failure to periodically account for and acknowledge the capital value of the promise to pay future pensions is a somewhat alarming omission from the UK’s balance sheet.”
Standard Life head of pensions strategy Jamie Jenkins says: “There is a question mark around its affordability. There wasn’t consensus to commit for long periods of time because of its potential to become unaffordable.”
The triple-lock supplanted a previous move to link pensions to earnings put into legislation by Labour before the 2010 election, but was only installed as a temporary measure.
As a result, Towers Watsons senior consultant David Robbins says the overall cost of implementing the policy must be weighted against any alternative system.
He says: “It’s either expensive or cheap depending on what the baseline is. Under legislation the state pension has to rise at least in line with national average earnings growth.
“And if you look at the Office for Budget Responsibility projections for the next five years, in four of those years, the element of the triple-lock that determines the increase is national average earnings growth.”
The Institute for Fiscal Studies says the triple-lock better protects pensions from real-terms cuts, but also warns it results in a “ratcheting effect” through which state pensions are guaranteed to exceed both earnings and prices in the long-term.
IFS figures suggest the state pension will likely exceed earnings and inflation by 0.3 per cent every year under a triple-lock. It says this will increase state pension spending by around £15bn a year in 2015/16 terms compared with a policy of earnings indexation.
IFS senior research economist David Phillips says: “Maybe the Government is happy for pensions to rise by more than earnings in the long-term because it thinks they are too low right now.
“But the way it works under the triple-lock is really strange. If you think pensions are too low relative to earnings, then it’s better to do that via a policy of above earnings increases.”
He adds: “On average earnings go up by about 4 per cent and prices go up by about 2 per cent a year. If that average is replicated every year, then the state pensions would just go up with earnings.
“But you have some years where earnings are high and some years where they’re low and the same will be true for inflation. In those circumstances you’ll get above earnings growth.
“How fast the state pension grows in the long-term doesn’t just depend on what happens to earnings over the long-term, or what happens to prices, it will depend on what happens year-to-year and the correlation between the two.
“It delivers in a way that isn’t transparent and isn’t guaranteed, and depends on correlationsbetween different things and randomness between inflation and earnings. It’s not a very sensible way of delivering above earnings increases, even if that’s what you want to do.”