The upcoming election promises food for thought for the pensions world, whether in relation to the state pension, public sector pensions or economic policy that will impact on the private sector. Just make sure you chew it carefully.
Since the turn of the New Year, a sixteen month campaign period has begun in the run up to the General Election in May 2015. Where traditionally speculation over the date of the election has occupied political commentators, the tie-in deal entered into by the Coalition means that there will be more focus on the respective manifestos of the leading political parties.
Pensions will undoubtedly feature on the agenda for the election campaign; indeed, it is already making the front pages. Labour have waded in to challenge insurers over charges to pension schemes in the private sector, the Conservatives have laid claim to the biggest cash rise in the state pension and the Liberal Democrats are championing a further reduction to the lifetime allowance for pensions.
Pensions is an issue that should interest the entire spectrum of the electorate. Whether receiving a state pension, a high net worth individual looking to reduce pension tax liability, or a member of a scheme yet to retire, voters would be naïve not to dig a bit deeper into the policies that may define the next government’s approach to pensions.
Triple lock system
David Cameron kicked off his campaign with an emphatic announcement that if they win the election the Conservative Party will protect the state pension using the ‘triple lock’ system until 2020. This certainly sounded appealing to the demographic at whom it was pitched, but on closer inspection does it really offer the protection suggested?
The triple lock system was introduced in 2010 and means that the basic state pension rises by the higher of wages, prices or 2.5%. When the triple lock system was introduced the government made a switch from the retail prices index (RPI) to the consumer prices index (CPI). Towers Watson have carried out research for The Telegraph that suggests, if the government had continued to use RPI, pensioners would actually be better off in April 2014 than they are under the triple lock system (by up to £57.20 per year). Since the change in 2010, the government has had to increase the state pension less, partly due to the fact that CPI typically rises more slowly than RPI, and partly because wages have been largely stagnant throughout the recession.
On the other side of the coin, the triple lock system is not wholly dependent on inflation. Historically, when inflation was low, the state pension would see little increase. Now, the “real” value of the state pension is arguably more secure because it is not as sensitive to the fluctuations of inflation.
With the benefit of hindsight, perhaps sticking with RPI would have been better for those relying on the state pension. Whatever your opinion of David Cameron’s triple lock promise, it underlines the challenge for voters in getting to grips with pensions policy.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.