In June MPs called for the State Pension triple lock to be suspended during the C-19 crisis. Jon Greer, head of retirement policy at Quilter considers Chancellor Sunak’s decision not to touch the triple lock in his July statement and what that may mean come the Autumn Budget
The Chancellor has decided not to change the state pension triple lock in his summer economic statement, despite concerns that abnormal wage volatility next year once the furlough scheme ends will provide a considerable boost to the level of the state pension at a time when many are out of work and the government struggles to control the deficit as a result of Covid-19.
The triple lock has worked well in reversing the relative decline in the state pension so that it has made up much of the ground it had lost relative to earnings during the 1980s and 1990s. However, as a result of Covid-19 and the government’s furlough scheme, wages are expected to fall by 3.3% this year, but then bounce back next year creating a one-off spike in wage growth, increasing by 5%.
This will increase the old-style state pension by £532.30 a year by 2022/23 and the new style state pension by £694.67 a year at a time when many will be out of work and inflation will remain low. For many, this is perceived to be untenable both in terms of its fiscal sustainability and intergenerational fairness.
In the autumn, the government are likely to make a change to the triple lock and could temporarily amend the triple lock by uprating the state pension based on the higher of 2.5%, inflation or five-year rolling average wage growth. This will smooth any abnormal wage effects whilst protecting real incomes and saving the government a considerable amount each year.
Under this methodology, the old-style state pension will only increase by £374.88 a year in 2022/23 and the new style pension by £489.23. This is equivalent to the government saving approximately £2.2bn by 2022/23.
Maintaining the triple lock in its current form is simply not an option. The government should use this opportunity to carefully consider the merits of moving to a long-term solution, such as a smoothed earnings link, so that pensioners share in the proceeds of economic growth, whilst protecting their income against inflation and ensuring intergenerational fairness.