End of triple lock: What is the double lock and will it work?

Andy Burnham has pledged to drop the triple lock on state pensions for a so-called ‘double lock’ in Labour’s next manifesto in order to pay for his new National Care Service. In an address to party members, Burnham confirmed the existing triple lock mechanism will remain in place for the remainder of this parliament before being changed in April 2030 if Labour win the next general election. Under the proposed system, the state pension would increase each year by either inflation or 2.5 per cent depending on which is highest. This removes the possibility of the pensions spiking from volatile wage growth. The downgrade to a double lock has occurred once before under the Conservative government during the 2022/23 financial year, where the end of the Covid furlough scheme sent wage growth rocketing 8.4 per cent. This would have granted state pensioners a rise of £785. By temporarily introducing the double lock, pensions increased by the 3.1 per cent inflation measure, saving the government an estimated £4.5bn over the course of the year. Funding national care service If the scheme was left unchanged, the Office of Budget Responsibility estimated the cost of the state pension would balloon by more than £15bn per year by 2030.   Spending on the state pension has also rocketed £16bn higher per year due to the triple lock according to the Institute of Fiscal Studies.  But industry figures have argued Burnham’s decision to remove wage growth as a factor is a relatively modest reform that will ultimately fail to bankroll his ambitious social care plans. “The idea that scrapping the triple lock will bankroll social care on its own is simply fantasy,” said Rachel Vahey, head of public policy at AJ Bell. “There’s a mismatch between one policy – scrapping the triple lock guarantee, saving a little over a long period of time – and another, introducing a social care system costing a lot immediately. “The numbers simply don’t stack up, at least until the cumulative annual saving from lower state pension increases adds up to the cost of running a social care system.” Jonathan Cribb, deputy director of the Institute for Fiscal Studies, said: “The savings to the Exchequer from this reform are likely to be relatively small in the first few years.” “However, over time the new triple lock will prevent the state pension being locked into an ever-increasing level of generosity compared with workers’ earnings, thereby generating significant savings in the long run.” Earnings confusion Vahey claimed replacing the triple lock guarantee with an inflation link also risks the state pension gradually “losing pace with earnings and causing pensioners’ income to fall”. Burnham confirmed the state pension will continue to maintain its “value relative to earnings over time”, thanks to the new calculation whereby – according to the Institute for Fiscal Studies, the new state pension would increase by the maximum of CPI inflation, 2.5 per cent, or :the amount needed to ensure the state pension keeps up with average earnings growth since the introduction of the new policy.” Maike Currie at Pension Bee said that removing the explicit annual earnings measure from the formula would leave the government forced to rely on multi-year reviews, in particular as energy shocks continue to hit the market. She said: “Without official earnings figures in the annual uprating formula, we need to understand how that commitment will work in practice.  “With inflation already above the Bank of England’s two per cent target and vulnerable… an inflation-linked double lock could still prove expensive if no cap or control mechanism is in place.” Tomm Adams, partner at Blick Rothenberg, added Burnham left a “fair amount of detail unspoken”, but the PM could be waiting for “the Treasury and OBR to do the full costing”. Investment analysts and advisers are urging savers to act with caution in the wake of the prime minister’s announcement, but to consider if their retirement pot has enough scale and diversification to fund retirement if the state pension no longer keeps pace with wage growth. Susannah Streeter, Chief Investment Strategist at Wealth Club, said: “For those with several years or decades still to go before retirement, it’s abundantly clear that the private pension pot may need to do more of the heavy lifting.  “The State Pension remains an important foundation for retirement income, but people approaching retirement may increasingly need to rely on their own savings and investments to provide the income they want and to help bridge any gap between State Pension payments and their previous standard of living.”