Figures this week showing price inflation at 0.6% and average earnings dropping by 0.3%, will put pressure on the Government to call time on the 2.5% guaranteed increase to state pensions before next April
A 2.5% increase would cost just under £2.5bn for the 2021/22 tax year and all future years
Fuller rethink may be needed before April 2022 if current falls in average earnings are reversed with sharp increases, potentially putting state pensioners on track for a double digit increase
A 10% increase would lock the Government into £10bn of additional spend from 2022 onwards
But state pensions are a lifeline to many elderly and Government spend here needs to be viewed in the context protecting jobs for younger generations
There is much speculation that the Chancellor may make changes to the state pension triple lock in his Autumn Budget as one way of helping put the nation’s finances back on a stronger long-term footing.
The triple lock, which the Government recommitted to in last year’s election Manifesto, increases state pensions at the highest of price inflation, increase in national earnings or 2.5%. Looking across the 10 years since it was introduced, state pensioners have benefitted from increases above both price inflation and national average earnings growth. While very welcome for pensioners, it’s also very expensive and its affordability was being questioned by some even before COVID-19 sent shockwaves through the nation’s finances.
In 2018/19, the Government spent £95.5bn on state pensions, meaning every 1% increase adds around £1bn to the bill, for that year and all future years. With no fund built up to pay future state pensions, it’s paid for from the National Insurance Contributions of today’s workers.
This week’s official figures show inflation remaining well below 1% and national average earnings falling by 0.3% even before furlough is fully reflected in the figures. In these unprecedented times, the affordability and fairness of sticking with the current triple lock formula will be under scrutiny.
Steven Cameron, Pensions Director at Aegon comments: “For many, the state pension is their main source of income in retirement, and the triple lock has proved valuable in making sure their purchasing power keeps pace with both price increases and wage growth with an underlying 2.5% guaranteed increase. But with the fallout of COVID-19 meaning price inflation looks set to remain below 1% for some time and national average earnings already declining with further drops forecast as furlough is fully factored in, the fairness and affordability of a 2.5% minimum increase will come under question. The Chancellor, preparing for his Autumn Budget, will be alert to this as a 2.5% increase next April would cost the Government almost £2.5bn, not just in the coming tax year but in all future years.
“This raises major issues around how to share the cost of repairing the nation’s finances across generations. While scrapping the 2.5% guarantee would save billions, this needs to be viewed alongside the huge sums being spent on those of working age, with the furlough scheme expected to cost £69bn, the bonus for keeping workers on after furlough up to a further £9.4bn and a predicted £2.4bn price tag for the kickstart scheme for under 25s. However, these schemes are one off’s and unlike state pension increases, don’t lock the Government into additional spend in future years.
“Even if the triple lock survives till next April, it will come under greater pressure ahead of April 2022. Latest figures show average earnings are already falling and a further significant fall is widely expected. largely because of pay cuts suffered by furloughed employees. We all hope the Chancellor’s job protection measures will create just as big a bounce-back the following year, but this means blindly following the triple lock formula could see pensioners awarded a double digit increase in 2022 after a 2.5% increase in 2021. Meanwhile, those of working age may just be getting back to pre COVID-19 earnings. To avoid this, the earnings component of the triple lock may have to be suspended or temporarily averaged out over two or more years until earnings stabilise.
“Any change to the triple lock, which the Government recommitted to in its 2019 Manifesto, will be hugely unpopular with state pensioners and the Chancellor might decide to swallow the cost of a 2.5% increase in 2021. But however politically unpopular, the Government needs to be open about possible or likely changes in future years. With many pensioners needing to get by on fixed incomes, it’s vital they know well in advance what to expect and are not left disappointed if expectations aren’t met.”
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