Under the terms of the state pension ‘triple lock’ policy, which was repeated in the 2019 Conservative manifesto, the pension should rise by the highest of:
- The growth in prices as measured by CPI in the year to September – this has today been announced at 0.5%;
- The growth in average earnings in the May-July quarter compared with a year earlier; this was actually a negative figure: -1.0%;
- A floor of 2.5%
The legal requirement on the government is simply to increase the pension at least in line with the growth in average earnings.
Because this was negative, the government has had to pass a short piece of legislation (the Social Security (up-rating of benefits) Bill) to give them powers to pay *any* increase in pensions next April. Although this legislation did not give a specific figure, the explanatory notes to the Bill said that it “..will allow the Government to meet its commitment to the Triple Lock” (see: https://publications.parliament.uk/pa/bills/cbill/58-01/0186/en/200186en.pdf para 5).
The bigger challenge to the Chancellor is likely to come when he sets the increase for April 2022. It is widely expected that average earnings will bounce back next year from the depressed level seen this year, especially for workers on ‘furlough’. The OBR has pencilled in a 5% figure for use in next year’s triple lock calculation. If this was correct, this would be larger than the 2.5% floor and larger than the likely level of inflation. But paying a 5% increase would add a further £9 per week to the basic pension and might be challenging if inflation was low and unemployment was rising.
One option for the Chancellor next year would be to ‘smooth’ the application of the triple lock by measuring all the key elements over two years rather than one. This would smooth out the slump and surge of earnings, and could lead to a second 2.5% increase in April 2022.
Commenting, Steve Webb, partner at LCP said: “Despite low inflation and falling earnings, the triple lock policy is likely to lead to the main state pension rate rising by 2.5% next April, an increase of five times the rate of inflation. Given that the UK state pension is still low by international standards, the Chancellor may feel justified in going ahead with such an increase. He will however face a bigger challenge next year if earnings bounce back and if the triple lock policy would imply an increase of 5% or more. At that point we may see a more ‘flexible’ interpretation of the government’s manifesto commitment”.
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