Pensions - Articles - State pension triple lock may yet survive

Comment from Steven Cameron, Pensions Director at Aegon, following today’s publication of the ONS labour market statistics and average weekly earnings figures.

 Today’s earning figures for July are critical for state pensioners as they form part of the controversial ‘triple lock’ formula which bases increases on the highest of earnings growth, inflation or 2.5%

 With earnings having fallen by 1% (total pay as -1% to July 2020) and inflation around 1%, state pensioners are expected to receive a 2.5% increase next April

 While earnings less volatile than many feared, triple lock affordability may still prompt Government to look at smoothing earnings growth over 2 years to reduce distortions cause by the furlough scheme

 Steven Cameron, Pensions Director at Aegon, comments: “The latest earnings growth figure, showing total pay has fallen by 1% to July*, has important implications for state pensions, as it is one of the three measures setting the state pension 'triple lock’ increase next April. The triple lock formula grants state pensioners the highest of earnings growth to July**, inflation till September, which will be announced next month, or a minimum 2.5%. With furlough distortions leading to negative earnings growth at -1%, and price inflation hovering around 1%, the current formula would lead to the state pension increasing by 2.5% next April, 3.5% above the average increase in earnings for the last 12 months.

 “Retaining the 2.5% minimum increase next April at a time when earnings have fallen and price inflation is low might be seen as more generous than was originally intended. But many were expecting a sharp fall in earnings this year, followed by a sharp recovery the next. The formula could see state pensioners receiving a relatively generous 2.5% increase in April 2021 with some predicting a double digit earnings related increase in 2022. This hugely expensive hike would coincide with many workers just seeing earnings returned to pre-Covid levels, raising big questions around intergenerational fairness.

 “There has been speculation of tension between the Prime Minister not wanting to break a Manifesto commitment to retain the triple lock and the Chancellor fearing an unaffordable increase in the state pension bill. With earnings not having taken the fall many feared, a bounce back the next year may also be less pronounced, avoiding an extreme increase to state pensions in 2022. But if there remain concerns over future earnings volatility, adjusting the formula by averaging out earnings growth over 2 years would strike a fair intergenerational balance. This would see state pensioners receive an expected 2.5% increase next April with the increase in 2022 factoring in how earnings have performed over a 2 year period.”


 * Latest ONS Figures

 ** The indicator used for earning growth is the percentage change over the year to July in the 3-month average value of the whole economy earnings index (seasonally adjusted and including bonuses). (p5)

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