On the horns of a dilemma
Has the prime minister killed a sacred cow of Tory policy in the interests of fairness?
Last week, Theresa May announced that a Conservative government would end the State Pension ‘triple lock’ in 2020 if the party wins the election this June. The Conservatives had previously committed to keeping the measure in place until then, but had made no promises beyond that.
The triple lock guarantees annual State Pension increases at whichever is the highest of three rates: 2.5%, average earnings, or the Consumer Price Index (CPI). But under Tory proposals it would be replaced with a ‘double lock’ from 2020, meaning that the State Pension would rise in line with earnings or CPI – again, whichever is highest – but not by a guaranteed minimum of 2.5% a year.
In an era of extremely weak earnings growth, the triple lock has lifted the value of the State Pension relative to both average earnings and prices so significantly that the government felt obliged to act – possibly in the interests of social equality.
This year’s Conservative Party manifesto spelt out the change of course: “The triple lock has worked: it is now time to set pensions on an even course. So we will keep our promise to maintain the triple lock until 2020, and when it expires we will introduce a new double lock.”
Yet Conservative MPs fear that their party risks a backlash from older voters on 8 June. Jan Shortt of the National Pensioners Convention told media that the stance of all parties on the triple lock would be a “litmus test for the grey vote” on election day.
Jeremy Corbyn, leader of the opposition, has already committed to keeping the triple lock in place under a Labour government, while the Liberal Democrats have said that the triple lock would stay in place until the end of the next parliament in 2022.
Changing the lock
The decision to replace the triple lock comes after a year-long review of the State Pension, a review in which John Cridland, former head of the Confederation of British Industry, recommended that the link to inflation should also be scrapped, leaving only a link to earnings in place.
While the government has stopped short of removing the link to inflation, the downgrade to a double lock could reduce public spending and help the government stick to its borrowing commitments. Nevertheless, it is rare for both average earnings and CPI inflation to be below 2.5%, so removing the 2.5% component of the triple lock may do little to reduce the cost of the State Pension in real terms.
However, Cridland also called on the government to increase the State Pension age to 68 earlier than planned – a move that would save taxpayers billions of pounds.
The Conservative manifesto confirmed that the State Pension age would increase so that it “reflects increases in life expectancy, while protecting each generation fairly”, but it failed to mention any timetable or detail of changes – possibly to avoid more hostility from pensioner groups ahead of the election.
“The State Pension is one of the biggest costs to the public purse,” says Ian Price, divisional director at St. James’s Place. “If the next government is serious about ensuring its affordability, it is quite possible that the State Pension age will rise faster than the current timetable,” he says.
“It is another reminder that those who reduce their reliance on the State Pension and build a sufficient pension pot from earnings will have the best chance of choosing when they retire.”
Meanwhile, the Liberal Democrats have called for a review of pension tax relief on private pension contributions. In its manifesto, it said it would consider the case for introducing a single rate of tax relief, which would be designed to be “simpler and fairer and would be set more generously than the current 20% basic rate relief”.
Similar reforms were considered by George Osborne, the previous chancellor, before Budget 2016. Those proposals were eventually dropped, but they will almost certainly be back on the table, especially as the government is looking to fill the £2 billion funding gap created by the decision to drop increases to National Insurance contribution (NICs) rates for self-employed people.
After his climb-down on NICs in March Philip Hammond, the chancellor, wrote to MPs saying that “The cost of the changes… will be funded by measures to be announced in the Autumn Budget”. Whether this means he will press ahead with changes to pension tax relief remains to be seen, but the view is increasingly held that it is a question of ‘when’ rather than ‘if’.
“No future government can continue to kick this can down the road,” says Price. “What is certain is that pension tax breaks for high earners are unlikely to become more attractive. Those who can should try to make the most of the very generous allowances while they are still available.”
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.