RACHEL RICKARD STRAUS: Goodbye to triple lock – I doubt it’ll be back to stay

It is an open secret that the state pension works like a giant Ponzi scheme. When employees pay national insurance contributions, they are not segregated to fund their own state pensions. There isn’t a nice pot of money coming up for me anywhere, labeled “Rachel’s Retirement.” Instead, employee contributions are now used to pay the state pensions of current retirees.

Of course, there is no theft or cheating, as with real Ponzi schemes. But if a private pension were managed like the state pension – with funds that can pay only a fraction of the obligations – the managers would certainly be arrested.

We have an unspoken intergenerational agreement. Employees pay for current retirees with the expectation that they will receive the same treatment from future employees upon retirement.

This works well while at least as much goes into the jar as comes out. But a report from the State Actuary last week suggested that the days of balancing the books were numbered.

The National Insurance Fund is in surplus, but will likely be in deficit next year. In fact, another report from the same calculators last year predicted that the fund would be exhausted within ten years.

The pot is emptying for two main reasons. Firstly, the population is ageing, which means that fewer people pay and claim more. While in 2020 there were 27 retirees for every 100 employees, by 2085 there are expected to be 43.

Secondly, the AOW becomes more generous – and therefore more expensive – every year thanks to the triple lock. This guarantees that it will rise each year at the rate of earnings growth, inflation or 2.5 percent – whichever is higher. The 10.1 percent increase this year – expected in April – will be the biggest increase since 1991.

What can we do to ensure that the state pension is available for future generations? There are a number of options – none particularly tasty.

Workers could be asked to pay higher national insurance contributions. But with millions already struggling to make ends meet, higher taxation could be a tall order.

The government could supplement the national insurance pot with money from general taxes. It’s happened in the past, and the Treasury has to pay out if the fund falls below one-sixth of its annual expenses. But more money spent on pensions may mean less for schools, hospitals, roads or defense.

Alternatives are to give pensioners less, instead of asking employees to pay more. Think of lowering or testing the AOW or raising the age at which we qualify for it.

None of those options will go down well – as a glance across the Channel confirms. On Thursday, more than a million people across France joined protests against plans to raise the retirement age from 62 to 64.

I suspect this dilemma will play out in different ways over the coming decades. I think it is inevitable that a government with a large majority will eventually find an excuse to break the triple lock. Once broken, I doubt it will come back.

Second, I suspect there will be changes to pension commitments well into the future. People in their 20s and 30s are less likely than people nearing retirement to take to the streets to protest changes to their pensions when those changes won’t affect them for decades.

On page 65 of Wealth & Personal Finance, reporter Sarah Davidson outlines what you can do to get the retirement you want. One of her valuable suggestions is that younger workers should take care not to become overly dependent on the state pension after retirement. It may not exist forever in its current form.

The forecasts indicate that the AOW pot will run out ten years before my retirement. I can’t help feeling nervous.

Good news for shareholders

Wealth platform Hargreaves Lansdown said on Friday it is making it easier for clients to exercise their shareholder rights.

It will be easier for them to attend meetings of companies in which they hold shares. Voting also becomes easier.

About time. We have been advocating for investment platforms to up their game for years. I hope that the stragglers now also go a step further.