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Contentious triple lock survives Covid-cull

23 September 2020

If you are covering reports that the government will maintain the triple lock to uprate state pension income in 2021/22, please see the following comment from Ian Browne, pensions expert at Quilter:

“Despite the glum warnings about the prospect for jobs and the economy, the government has stuck by their manifesto commitment to maintain the triple lock and guarantee at least a 2.5 per cent increase in the state pension next year. Given both earnings growth and inflation will be around or below 1 per cent next year, the triple lock will guarantee a 2.5 per cent increase in the state pension next April, which means recipients of the individual full basic state pension will receive £7,155.53 a year, up from £6,981 this year and recipients of the new style state pension will receive £9,338.16 a year, up from £9,110.4.

“This is despite the fact that inflation is predicted to remain low, or perhaps even negative, for some time to come and average earnings growth will remain subdued given the gloomy employment environment resulting from Covid-19. There is a danger that guaranteeing a 2.5 per cent boost to the state pension is perceived to be intergenerationally unfair, given it will provide a considerable boost to pensioners’ income when many others are taking a cut in their pay, working less hours or have lost their jobs altogether.

“But even more contentious is the fact that once the furlough scheme ends later this year and if wages recover, in its current form the triple lock will provide an artificially large boost to state pension income in 2022/23 when we could be in the clasp of a deep recession and when the government is struggling to control the deficit.

“Once wages recover next year, average earnings growth is expected to bounce back to create a one-off spike in wage growth, estimated to be as high as 5 per cent [1]. This will increase the full basic state pension to £7,513.30 a year in 2022/23 year, and the new style state pension to £9,805.07 a year.

“As such, the triple lock will no longer provide a link between the real economy and increases in the state pension. The 8% boost in state pension income over two years will come at a time when real economy metrics including earnings, employment, growth and inflation are flat.

“Now the government has shown it is willing to honour its manifesto commitment to keep the triple lock, will the Chancellor do the same with the triple promise not to raise income tax, VAT or national insurance?”

 

[1] Figures based on the Bank of England Monetary Policy Committee’s May 2020 report figures for average weekly earnings, which treat the furlough scheme as a subsidy to companies rather than a transfer to households (as is assumed by the OBR in their reference scenario). The MPC’s projections have been amended to reflect the fact that the government base state pension uprating on data between May and July rather than the whole calendar year (as is the case in the MPC report). The fall/rise in earnings is likely to be exaggerated in this period given the immediate impact of COVID-19.

James Ventress

Corporate Affairs Executive

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