It was in 2001 that Gordon Brown, the chancellor of the exchequer at the time, first introduced the idea of guaranteed minimum state pension increases, after being attacked for raising the basic state pension by just 75p. More than 15 years later, the issue remains a hot potato for politicians. The “triple lock” state pension promise has become a key election battleground, with the Conservative Party manifesto suggesting it should be downgraded.
Under the triple lock, the value of the state pension rises each year by the highest of price inflation, the increase in average earnings, or 2.5%. Pensioners are thus able to keep up with the cost of living, don’t lose out compared to those in work, and still get a decent pension increase in cash terms, even if inflation and salary rises are very low, as they have been in recent years. However, the cost of this has led to calls for a rethink.
In this election, while both Labour and the Liberal Democrats have promised to maintain the triple lock until at least the end of the next parliament, the Conservatives are only planning to keep it in place until 2020. From then on, they propose to switch to a double lock, sticking with the promise to upgrade pensions each year only by the higher of earnings or inflation. Labour and the Lib Dems have naturally seized upon this proposal as an opportunity to inflict political damage. But the Tory plan is similar to recommendations made last year by the House of Commons Work and Pensions Committee, which criticised the current system as “unsustainable” and unfair on younger people. The triple lock was also criticised by former Confederation of British Industry boss John Cridland, who earlier this year published a report on the future of the state pensions system.
Still, would the Conservative plan really bring the cost of state pensions down significantly? Probably not, because it’s relatively unusual for both average earnings increases and price inflation to come in at below 2.5%. In other words, the element of the pledge that the Conservatives want to drop rarely costs any money in practice. In fact, the Institute for Fiscal Studies estimates that by 2065 the Conservative proposal would reduce state spending on pensions by just 0.2 percentage points of national income, against the 7% it expects the triple lock to cost. That’s the equivalent of around £5bn over the period, which is pretty trivial against the annual cost of state pensions, which is in excess of £100bn. To get more substantial savings, any government would have to abandon the earnings element of the triple lock, which is expensive because average earnings generally rise more quickly than inflation. Doing so, however, would expose politicians to criticism that pensioners were being treated unfairly compared to people in work.
Some critics of the triple lock have argued that it was introduced to help pensioners catch up with younger people, whose incomes rose more quickly for a long period prior to 2001 – when the state pension just went up in line with inflation each year – and unduly favours retired people over younger workers. However, even here, the triple lock has only a limited effect, according to researchers at the University of Sheffield. The full flat-rate state pension is currently worth 31.4% of average earnings – and on the current system won’t rise above 32% before 2028.
The row over the triple lock underlines the difficulty of managing state pensions. Politicians recognise that increasing life expectancies will increase the long-term cost of retirement benefits, but there are no quick fixes for this issue. And in the middle of an election, any discussion about reform is certain to descend into political point-scoring very quickly.
Firms mustn’t prioritise dividends over pensions, says regulator
Companies that pay generous dividends to shareholders without properly addressing a deficit in their final-salary pension scheme could face investigation and regulatory action, the Pensions Regulator is warning. The watchdog has promised to crack down on businesses it believes are unfairly favouring the interests of shareholders over those of pension-scheme members – and may find it easier to do so in future, with the government promising to give it new powers to scrutinise companies’ pension policies.
The regulator’s warning follows the BHS controversy, in which Philip Green, the retailer’s former owner, was accused of leaving its pension scheme underfunded, despite drawing large dividends from the firm. Green denied any wrongdoing and has subsequently promised additional payments into the BHS scheme, but the row has succeeded in focusing attention on the issue.
Now the Pensions Regulator says it will automatically look at any situation where a company pays out more in dividends to shareholders than it commits to reducing its pension-scheme deficit by making additional contributions. Unless such companies can show they have a credible strategy
for rapidly addressing the deficit, they’re likely to face
an investigation.
The regulator’s tougher approach is likely to unnerve firms with large pension-scheme deficits, many of which also face pressure from shareholders to maintain and increase dividend payouts. Half the companies in the FTSE 100 index would be able to clear their pension deficits within two years if they suspended dividend payments, according to recent research from JLT Employee Benefits.
It also identified only six companies for whom spending on final-salary pension-scheme contributions was greater than the value of dividends paid to shareholders. The regulator’s own data also suggests pension-scheme members’ interests aren’t always being prioritised. In 2010, the value of deficit recovery contributions paid by FTSE 350 companies was the equivalent of around 17% of dividend payouts, but this figure has since fallen to 10%.