A Triple-Locked Secured Income… But For How Long?
There hasn’t been much good news around for pensioners over the last couple of years, but the State Pension has been one rare bright spot. In this article, we focus on the escalation of State Pensions and the much talked about ‘triple lock’. This article is relevant for anyone studying for their R04, J05 or AF7 exams.
This article is correct as at 9 October 2023.
Escalation on Private Pensions
Many of those holding private defined benefit schemes have experienced a decline in their real terms spending power in recent years. That is because many schemes are only required by law to escalate pensions in payment at a certain level. Loosely, this is generally CPI capped at 5% or 2.5% depending on when the benefits were accrued.
Some schemes may offer more beneficial inflation proofing, either by choice or due to the way their scheme rules are worded. For example, those whose scheme rules referred to the benefits being indexed in line with RPI are still obliged to use that measure, despite the statutory measurement for inflation having changed to CPI in 2011. Conversely, those whose scheme rules referred to ‘statutory’ escalation are at liberty to use the CPI, which usually works out less costly for the scheme.
Conversely, there are some tranches of benefits, for example, pre-1997 GMP excess, for which there is no statutory escalation requirement whatsoever. This means pensioners may face a horrendous drop in spending power.
Escalation on State Pensions
The State Pension, however, is supported by the triple-lock guarantee. This means that pensioners benefit from an annual increase which is based on the highest of CPI (as of the previous September), the increase in National Average Earnings and 2.5%.
The government famously suspended the triple lock guarantee for one year in April 2022. This was due to the distorting effect of the COVID-19 pandemic, which saw a massive drop in average earnings as people were furloughed or made redundant, to be followed by an equally spectacular rise once things returned to somewhat normal.
It was unfortunate for pensioners that this was immediately followed by an inflation crisis which rendered the 3.1% rise inadequate. However, with a 10.1% increase in April 2023 and an average earnings linked 8.5% set to apply from April 2024, there is at least some light at the end of the tunnel for those in the decumulation stage.
Is the triple lock here to stay?
The future of the triple lock, however, remains the source of intense speculation. It was introduced in 2010 by the Conservative/Liberal Democrat coalition government to attempt to ensure pensioners’ spending power maintained parity with the real world. Due to the dire state of public sector finances in the aftermath of the pandemic and the energy and inflation crises and now with national debt currently standing at over 100% of GDP, there are heightened concerns over its ongoing viability.
Interestingly, the triple-lock applies only to the new State Pension and the pre-2016 Basic State Pension. Pre-2016 Additional State Pension, whether that be Graduated Pension, SERPS or State Second Pension, is subject to a lesser requirement linked solely to CPI.
It is, perhaps, unlikely that any changes will be made to the triple lock before the next Parliament. With a general election on the horizon, such a move would be likely to prove extremely unpopular with a large proportion of the electorate. However, pensioners might be wise not to base their plans on the triple lock, in its current format, being maintained indefinitely. Certainly one for pension exam candidates to keep an eye on.
Grab the resources you need!
If you’re studying for the next sitting of the CII R04 exam, and you’re a little nervous about it, grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the R04 mock exam paper taster now!
Alternatively, you can download a taster for AF7 or J05 if you are preparing for either of those exams.
