Pensions - Articles - Drop in inflation makes Pension Triple Lock more affordable


Steven Cameron, Pensions Director at Aegon, explains what today’s 2.3% inflation figure could mean for the future of the contentious State Pension Triple Lock.

 The latest drop in the inflation rate to 2.3% will be widely welcomed as a sign that price inflation is finally getting back under control, helping alleviate the cost-of-living crisis and hopefully paving the way to future falls in interest and mortgage rates. It’s also significant for the State Pension Triple Lock, which grants State Pensioners an annual increase equal to the highest of price inflation, earnings growth or a minimum rate of 2.5%.

 “For the April 2024 increase, earnings growth in 2023 produced an inflation-busting 8.5% increase. In April 2023, a spike in inflation the previous year led to a record-breaking 10.1% boost to the State Pension. These increases and the underlying high volatility that was present in both price inflation and earnings growth, have since raised serious questions over longer term affordability of the State Pension, which is paid for by today’s workers.

 “With inflation having now fallen below the 2.5% underpin, it’s likely to be earnings growth that determines next year’s Triple Lock increase, as the latest figures have this sitting at 5.7% (for January to March 2024). The specific figure used for determining the Triple Lock will be the year-on-year increase in earnings for the period ending May to July 2024, which will be published in September. Barring a significant drop in earnings growth over the next few months, this figure will likely determine next year’s Triple Lock.

 “If price inflation stays low and earnings growth also gradually falls back to levels more typical of the last decade, then the State Pension Triple Lock formula may produce more predictable and affordable increases. This will make it less costly for the next Government to commit to maintain it for a further 5 years. We may see lower rates of increases, but in times of lower inflation, the State Pension doesn’t need to increase by as much to allow pensioners to maintain living standards.

 “However, rather than a three-way comparison year on year, we’d recommend averaging the earnings component over a three-year period, which could smooth out excessive volatility and help ensure intergenerational fairness.”

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