Boris is said to be against any change as the triple lock was a pre-election Manifesto commitment. On the other hand, Rishi is believed to have concerns that the furlough scheme will distort earnings growth figures, with a fall this year followed by an artificially high increase next. This could mean state pensioners receive a 2.5% increase next April and a much higher increase based on earnings growth the following, while many workers’ earnings may be lucky to have returned to pre COVID 19 levels.
Steven Cameron, Pensions Director at Aegon said: “Since its introduction in 2010, the state pension 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% 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 in a very different pre COVID-19 age when price and earnings growth tended to be relatively stable year on year. Blindly following that formula now as we move through and out of the coronavirus crisis with huge distortions to average earnings expected could create bizarre results which were never intended and which would fail any test of intergenerational fairness.
“If as a result of the furlough scheme we see a sharp dip in average earnings this year followed by a quick and full recovery the next, the triple lock would still grant pensioners a 2.5% minimum increase next year and potentially put them on track for a much higher increase in 2022, while many of those of working age might have simply regained their pre COVID-19 earnings.
“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 2 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.”
Example
The following figures show what would happen based on illustrative examples of how earnings and inflation might move over the next 2 years
Under an averaging approach, for 2022, the increase would be based on the highest of growth in prices, earnings or 2.5% over the last 2 years, minus the increase granted in 2021.
2 year price inflation – 3%
2 year earnings growth – 6%
2 years of 2.5% increases – 5%
Highest over 2 years – 6% (earnings component)
Increase in 2022 is 6% minus the 2.5% paid in 2021, or 3.5%.
Over the 2 years, state pensioners will still have received increases at the highest of the 3 elements of the triple lock.
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