The UK Retired Triple Lock has done its job and needs to be retired

The UK pension triple lock is only for 15 years. But it did the job it was introduced for, and now it should be demolished.

So the Prime Minister is right that he wants to change it. Because while it has been widely treated as politically untouchable, the triple lock is very expensive.

That’s not to say it was unnecessary.

At the time it was introduced in 2011 (by the Conservative-led coalition) to tackle the problem of pension poverty, the state pension was only equivalent to one sixth of the national average income.

To reverse the decline in the pension relative to income, the triple lock mechanism meant that every year state pensions would increase, whichever was the greater of three measures: 2.5%, the rate of price inflation or average income growth.

The overall idea was to reduce poverty and ensure that pensioners benefit from growing prosperity if and when the economy grows.

Individually, those measures were introduced for slightly different reasons. Increasing state pensions in line with price inflation, for example, protects the purchasing power of the pensioner.

This is important because retired households have few – if any – ways to generate extra income, making them particularly vulnerable to price increases. When the price of food rockets, pensioners have to keep.

Increasing pensions in line with the average national income allows pensioners to participate in the growing prosperity when the economy grows. Without such a link, pension households would gradually be less well off in relation to the working age population.

But the 2.5% element of the triple block has no economic basis. It was introduced that even in periods of low inflation, and low growth, pensioners will see a slight increase in their income. (In 2000, when state pensions were just rising with prices, the annual pension increase that year was just 75p a week, an amount widely regarded as ridiculous).

Andy Burnham has pledged to adjust the triple lock from 2030 (if he is re-elected as Prime Minister) to reduce pension costs and free up funding for a new social care system.

His reformed triple lock proposal looks complex, but tries to avoid past pitfalls in state pension policy.

Its adjusted triple lock quite neatly maintains a link with the income and avoids the high costs that in the past led to the abolition of the income link altogether.

Before the Thatcher government of 1979, the state pension was increased annually by the rise of incomes and prices (a double lock) and was at its peak equivalent to 26% of the average full-time earnings of the working population.

Between 1982 and 2002, the state pension rose annually just in line with price inflation, with the relative value of the pension falling to 16% of average full-time earnings.

The current triple lock came about in 2011 when the coalition government followed through on a manifesto promise to restore the income link to pensioners.

In 2010, then Secretary of State for Work and Pensions, Iain Duncan Smith, said the triple lock was necessary after “years of neglect and inaction”. He added: “The value of the state pension has been eroded, leaving millions in poverty.”

In fact, the proportion of pensioners living in relative poverty (defined as having less than 60% of the median household income after taxes and housing costs) had fallen significantly by 2010 from 29% in the late 1990s to 14% in 2010. It remains at that level today.

Retired

The distinctive feature of double and triple locks is that they increase the pension every year by the most generous amounts. This accelerates pension growth and can enable relatively low state pensions to keep pace with working household incomes.

But these policies are expensive because they benefit all pensioners regardless of income or need. There are still some pensioners in poverty, but proportionally not more than the working population, and the new state pension is now around a third of average earnings.

Also, as evidence from the Institute for Fiscal Studies shows, the increase in the state pension can reduce the eligibility of a low-income pensioner for means-tested benefits, so that it is not better off overall. Other policies, such as the introduction of pension credit in 2002, have had a greater impact on reducing pensioner poverty.

Burnham’s proposal is to return to a double lock from 2030 with the state pension increasing each year by inflation or 2.5%. In addition to the annual increases, the value of the pension will be tested against the growth of the average income since 2030 and if the state pension has risen less than the income over the entire period, there will be an addition.

According to my calculations, if Burnham’s adjusted triple lock had applied from 2016, the current flat rate pension would have been £229.48 per week, which is around 5% less than the current rate of £241.30.

The proposed new system is complex, but aims to combine inflation protection and pensions that benefit from economic growth, while avoiding ridiculous increases in one year – and delivering significant and needed savings to the UK economy over the long term.