The state pension triple lock has been suspended for one year, the government has confirmed.
The change comes from the government’s concern that a post-pandemic rise in average earnings would have seen the state pension shoot up by 8%.
Work and pensions secretary Therese Coffey said the average earnings component of the triple lock would be disregarded for the 2022/23 financial year. It will rise, instead, by the rate of the Consumer Prices Index or 2.5% whichever is higher. The retention of the triple lock was a Conervsative manifesto pledge.
Pension consultancy LCP said the move would avoid a large one-off hike in pensions because of the spike in the average earnings figures as a result of the pandemic.
It predicted that, with inflation rising, it was likely the eventual increase would be in the 3% to 4% range, “which also broadly reflects the underlying rate of earnings growth with the effects of the Pandemic being stripped out”.
Former pensions minister and LCP partner Steve Webb said: “With the earnings figures showing a spike because of the pandemic it is understandable that the government has taken the decision to suspend the triple lock for one year only.
“But it is very welcome that they have recommitted themselves to the policy for future years.”
He added: “The UK state pension remains relatively low by international standards and many women, in particular, depend on the state pension for a large part of their income in retirement. To relax the rules on a one-off basis because of the distortions caused by the pandemic but to reinstate the policy for future years strikes the right balance.”
Andrew Tully, technical director at Canada Life, said: “The government has been walking a difficult tight rope regarding the triple lock and appears to have finally landed on a decision to remove the earnings-linked guarantee, a move that our research shows only 16% of adults support. By opting for a temporary ‘double lock’ the state pension is now likely to increase by around 2.5%.”
He added: “The furlough effect on earnings means that without a change the state pension would have been set to grow by around 8% at a cost of billions of pounds in a time when public finances are increasingly stretched. It’s important to remember that each 1% rise in state pension costs the taxpayer around £850m a year.”
Aegon pensions director Steven Cameron agreed the pandemic had created huge distortions to national average earnings with a fall in earnings at the start followed by a sharp increase as furlough ended.
“Sticking rigidly to the state pension triple lock formula would have granted state pensioners an unrealistic increase of around 8.8% at a time when earnings are still recovering from the pandemic,” he said.
“While many had called for some form of averaging of the earnings component, the government has decided to remove the earnings figure for this year entirely, moving to a double lock based on the higher of price inflation or 2.5%. This is likely to produce an increase lower than a smoothed earnings figure. All eyes will now be on September’s all-important CPI figure, announced in October, to see what the increase in the state pension will be next April.”
Cameron added: “But some adjustment was inevitable and only fair. Today’s state pensions are paid for by today’s workers through National Insurance contributions. Based on last month’s earnings data, a predicted 8.8% increase would have cost around £8bn next year and in every future year. Adding this burden to working age earners alongside the 1.25% increase to NI for the health and social care levy would have represented a double whammy hit to take-home pay.
“While the new deal on social care funding should eventually benefit us all, it is those above state pension age who are likely to benefit first, with younger generations picking up the initial cost. It would have severely stretched intergenerational fairness to also have granted such a major increase to state pensions, again paid for by today’s workers.”
Helen Morrissey, senior pension and retirement analyst at Hargreaves Lansdown said pensioners will, no doubt, be disappointed by the announcement.
“However, given many of the working population saw their income fall during the pandemic such a large increase would be unlikely to be popular – any solution needs to be fair to pensioners and taxpayers alike,” she commented.
“This along with the announcement that working pensioners will contribute to the Health and Social Care levy shows the burden does not solely fall on younger workers. The triple lock has played a role in boosting the incomes of pensioners over the past decade, but the current situation has exposed its flaws. While the suspension is only for a year, the time has come to look at whether the triple lock is fit for purpose and remains the best way to preserve the long-term value of the state pension,” added Morrissey.