Steven Cameron, Pensions Director at Aegon comments: “The Chancellor has some extremely difficult decisions ahead as he seeks to get the UK’s long term finances back on a sounder footing after unprecedented spending to support jobs and business during the pandemic. We strongly welcome his indications that he will approach decisions ‘with fairness in mind for pensioners and taxpayers’. Every generation has been affected by COVID-19, whether in terms of health and/or wealth, so future policy needs across all Government departments needs to be looked at through an intergenerational fairness lens. The ‘levelling up’ agenda shouldn’t just be about geography – it should also look at other factors such as age.
“In the pensions arena, the Office for Budget Responsibilities’ latest report on the economic and fiscal impact of the coronavirus pandemic showed just how costly distortions in national average earnings figures caused by the furlough scheme and the loss of low paid jobs could be for the state pension triple lock. If the technical formula is left unadjusted, state pensioners could be in for a bumper 8% rise in April 2022 costing around £3bn more than its previous estimates of government’s spending. The ‘distortion’ cost could be even higher as Office of National Statistics figures suggest a truer increase in average earnings is closer to 3% than 8%, adding £4.5bn to costs, both next year and every future year. And that will have to come from those of working age who fund today’s state pensions through their National Insurance, so might not go down well with NHS workers after their much lower pay deal.
“But as Rishi implies, there will be other decisions which will need to balance the interests of different generations. One is the long awaited deal on social care funding where providing much needed dignity to our most elderly will inevitably come at a cost that will need shared fairly. And changing tax relief incentives for workers currently saving for their retirement could also raise intergenerational challenges around fairness.”
Solutions to the triple lock dilemma
“On the triple lock, we believe the Chancellor has two choices which would retain the triple lock principles albeit with adjustment. The first would be to smooth out the sharp peaks and troughs we’re seeing in both earnings growth and price inflation and base triple lock increases on experiences over 2 or more years. The other would be to use an adjusted figure with distortions from furlough and loss of lower paid jobs stripped out, as the ONS has done. Otherwise, state pensioners could end up with windfall wins resulting from the chaos the pandemic has brought to workers. Whatever decision is made, the sooner plans are communicated the better so state pensioners aren’t left in the dark on what will happen to their payments.”
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