Pension firms are calling for temporary adjustments to the triple lock, amid reports that there are disagreements between the Prime Minister and Chancellor about whether this guarantee should be maintained.
Boris Johnson is reported to want to stick to the Conservative manifesto pledge to maintain the ‘triple lock’ protection on state pensions — ensuring this benefit increases each April by the highest of price inflation, earnings growth or 2.5 per cent.
However Rishi Sunak is said to be be concerned that the economic effects of the pandemic, and the furlough scheme in particular will distort earnings growth figures – with a fall this year, and an artificially high increase the following year.
This could mean state pensions rising by 2.5% in April 2021, followed by a much higher increase in 2022, at a time when most workers earnings will have barely returned to pre-Covid 19 levels.
Abandoning the triple lock could also help put the nation’s finances onto a sounder footing at a time of spiralling government debt.
Aegon pensions director Steven Cameron says: “Since its introduction in 2010, the triple lock has met its aim of making sure state pensioner incomes have at least kept pace with both inflation increases and earnings growth with a guaranteed underpin of 2.5 per cent each year.
“This has been an important means of offering fairness between generations and dignity in retirement to the UK’s elderly, particularly to those on the lowest incomes.
“But the formula was set when price and earnings growth tended to be relatively stable year on year.”
Illustrative examples suggest earnings could fall by 6 per cent this year, before rising by 12 per cent the following year. This would mean workers would see earnings return to pre-Covid levels after two years. But over the same period the state pension would rise by 2.5 per cent, and then 12 per cent, under the terms of the triple lock, far outstripping gains made by workers.
Cameron says that “blindly following that formula” as we move out of the coronavirus crisis, when there are expected to be huge distortions to average earnings could create “bizarre results” which were never intended and which would fail any test of intergenerational fairness.
Cameron adds: “ In these unprecedented times, we may need some temporary adjustments. One would be to look at the triple lock over two years rather than one. State pensioners could be granted whatever the formula produces next April but the increase in 2022 might be based on looking across a 2 year period. So if earnings do as expected fall then rise, this would be averaged out. Looking across a two-year period, the government would still be granting state pensioners he highest of the three elements but with artificial distortions from furlough smoothed out.
“If the PM and Chancellor are thinking of any such change, it will be important to announce this sooner rather than later. Pensioners are much more likely to accept a two year averaging as fair if they’re told of it now, not in a year’s time.”