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Monday, 30 March 2015

TRIPLE LOCKED DOWN

The basic state pension would be £1.15 a week higher from April 2015 if the Coalition Government had not changed the rules which the previous Government used to increase it. 


2001-2010
Under the previous Labour government the state pension was increased each April by inflation or 2.5% whichever was the higher. The measure used for inflation was RPI, the Retail Prices Index.

This rule was announced to Parliament by Chancellor Gordon Brown in his Pre-Budget Report on 27 November 2001.

"the Secretary of State for Work and Pensions and I have decided that...in future, the [basic] state pension will rise by at least 2.5 per cent...or more if inflation is higher." (col. 836-837)

The rule was confirmed as government policy by the Secretary of State for Work and Pensions on 15 June 2005 and again in the Pre-Budget Report on 9 December 2009 and was used for nine pension upratings from April 2002 to April 2010.

Brown's 'double lock' rule was a response to the embarrassment in April 2000 when the the basic state pension went up by just 75p – from £66.75 a week to £67.50. At the time the pension was increased each April by the rise in prices the previous September as measured by the RPI. The April 2000 rise in the pension was in line with this rule. At the time inflation was low and the pension was increased by 1.1%, the RPI in September 1999. But when this rise was announced in November 1999 it was widely condemned both in the press and among pensioners, some of whom felt so insulted they sent 75p - which was less than the price of three first class stamps - to Gordon Brown.

The Coalition
Before the May 2010 General Election the three main parties - Conservative, Liberal Democrats, and Labour - had all committed themselves to raise the state pension by the rise in earnings rather than prices and the understanding was that the rule would be earnings or prices whichever was higher, although that was not always specifically stated. Historically earnings have nearly always risen more rapidly than prices, though from early 2008 that stopped being the case and from 2010 earnings rose barely at all and even fell on some occasions.

The Liberal Democrat party went further and proposed in its manifesto (p.18) to raise the pension by earnings, prices or 2.5% whichever was the higher. That policy of a 'triple guarantee' was adopted by the Coalition government (p.26). The phrase 'triple lock' was in use by 6 July 2010.

However, the value of the triple lock was weakened by the Coalition Government's separate decision to change the index used to measure prices. Its June 2010 Budget announced  (para 2.32) that it would change the index used to raise benefits each year from the RPI to the Consumer Prices Index or CPI. Although the CPI was preferred by statisticians, the maths it uses ensures it is nearly always lower than the RPI by around one percentage point.

That cost-saving measure began for most benefits from April 2011 but was delayed for the basic state pension (para 2.33) until April 2012. But then for four upratings 2012, 2013, 2014, and 2015 the basic state pension was increased by the highest of earnings, CPI, or 2.5%.

In two of those years CPI was below 2.5% so 2.5% was used instead. But under the Brown 'double lock' rule the RPI would have been used for four years and the 2.5% floor only in 2015 when RPI was lower than 2.5%.



Source: ONS, DWP and Paul Lewis calculations using September indices and official uprating and rounding rules.

The result is that the basic state pension would have been higher for four years of the Parliament. And by April 2015 it would have been £117.10 a week instead of £115.95, an extra £1.15 a week or £59.80 a year. The total loss to a person receiving the full basic state pension is £163.80 over five years of Coalition upratings. The loss is due entirely to the change in price uprating from RPI to CPI.

Government response
The Coalition Government has claimed that Labour would have raised the state pension only by earnings. On 9 December 2014 Andrea Leadsom, Economic Secretary to the Treasury, told a Conservative MP that the triple lock had benefited pensioners by £560 compared with the Labour policy. That claim is based on Labour's 2010 Manifesto which states "we will restore the link between the basic state pension and earnings from 2012" (p.6:4) with no mention of prices or the 2.5% floor.

The Labour promise is the same as that in the Conservative Party Manifesto for the 2010 election which committed the party to "restoring the link between the basic state pension and average earnings" (p.12). It is implausible that a Conservative or Labour government would not have used an alternative price measure if that was higher than earnings and unlikely that either would have abandoned the 2.5% floor.

In any case this note compares the actual Coalition Government policy with the actual policy of the previous Labour Government and does not speculate about what would have happened if the 2010 General Election had turned out differently.

30 March 2015
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