Fresh threat to pension triple lock as furlough will skew formula
The government is reportedly looking to scrap the controversial pension triple lock as sustaining the protective measure for older Brits will become unaffordable in the post-coronavirus period.
The triple lock mechanism was introduced in 2010 in a bid to prevent inflation-linked increases paid to pensioners lagging behind the earnings growth of the working age population.
It allows the state pension to increase each year by the highest of average earnings, inflation or 2.5%. In the last year alone (2020/21), pensions have risen by an inflation-busting 3.9%.
But with the coronavirus crisis strain on public finances, the government will need to cut back spending, with the pension triple lock in the firing line, according to The Financial Times report.
Chancellor Rishi Sunak has been urged to scrap the mechanism or face escalating state pension costs. However, the move would mean breaking a Conservative manifesto pledge.
Analysts suggest that earnings next year compared with 2020 could skyrocket particularly where those on furlough (currently 9.1 million) return to 100% pay, up from the 80% under the Coronavirus Job Retention Scheme. This potential 20% uplift of earnings could potentially be applied to pensions under the triple lock mechanism. The figures could also be skewed by lots of low-paid jobs disappearing altogether.
‘Protect the principles of fairness and dignity in old age’
Steven Cameron, pensions director at Aegon, said the government can’t blindly follow a formula meant for the pre-Covid-19 era, and one which would fail the test of intergenerational fairness.
Cameron said: “Over the last decade, state pensions have increased by more than average earnings. This is an important means of offering fairness between generations and dignity in retirement to the UK’s elderly, particularly to those on the lowest incomes.
“The state pension formula was set in a very different pre Covid-19 age when price and earnings growth tended to be relatively stable year-on-year. But 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.”
He added: “Pensioners could potentially be on track for a double digit increase in 2022, while those of working age might have simply regained their pre-Covid-19 earnings.
“In these unprecedented times, we need to make sure we protect the principles of fairness and dignity in old age. Manifesto commitments aside, we can’t blindly follow a formula set in a different era. The government needs to explore ways of offering state pensioners a fair deal, with longer term security, while removing the effect of average earnings distortions likely in the coming years.”
However, TUC general secretary Frances O’Grady, said: “The triple lock is vital for increasing our state pension, which is one of the lowest in the developed world.
“Boris Johnson promised to honour his manifesto pledge to keep the triple lock just last month. Pensioners should be protected from the impact of any fall in wages or inflation this year.”
The government said: “Announcements on tax and pensions policy are for Budgets. The government is committed to supporting pensioners.”