Chancellor of the Exchequer Rishi Sunak is expected to break the Conservative party manifesto pledge of keeping the pensions triple lock in place.
This is because, according to the Financial Times, the policy is going to become unaffordable due to the costs associated with the outbreak of Covid-19 and subsequent lockdown.
Portfolio Adviser sister title International Adviser reported in May 2020, that the government was considering ending the triple lock to offset the debt accumulated to fight the economic fallout from the pandemic.
The triple lock sets out that the UK state pension increases every year according to average earnings, inflation or 2.5%, whichever is highest.
According to calculations by investment platform AJ Bell, the triple lock would increase the state pension by 21.3% within the next two years – 2.5% in 2021 and 18.3% in 2022 – costing the government £41.2bn.
Upratings based on average earnings would total £18.7bn, but if the increase is linked to inflation the sum would amount to £6.8bn.
Going with the latter option could save the UK government £34.4bn.
‘Astronomical’ costs
But any changes to the triple lock are likely to come up against significant resistance.
This was seen when former prime minister Theresa May came under fire for proposing to scrap the triple lock in the run up to the 2017 snap election, looking to instate a double lock instead, which would have got rid of the 2.5% guarantee.
The plan to take away the 2.5% increase by the then prime minister, alongside controversial social care policies, contributed to a significant drop in her lead in the polls.
The changes could have come into effect this year.
Scrapping the triple lock would also impact British retirees who have moved to European countries, since they see their state pension increase at the same rates, unlike their counterparts in countries like Canada and Australia, who have had their pensions ‘frozen’ at the rate available when they left the country.
But there is no guarantee that the policy will be included in the Brexit negotiations.
AJ Bell senior analyst Tom Selby said: “The devastating impact of Covid-19 on the UK economy could dramatically increase the cost of the government’s state pension ‘triple-lock’ manifesto pledge over the next two years.
“The triple-lock is meant to provide a relatively straightforward underpin to people’s state pension incomes. However, it simply wasn’t designed for a world where inflation or earnings are veering so wildly from one year to the next.
“The implications this could have on the cost of the triple-lock over the next two years are astronomical and it is hard to see a way Boris Johnson can stand by one of his key election promises,” he added.
Offer a ‘fair deal’
According to Steven Cameron, pensions director at Aegon, the triple lock policy was not set out with a Covid-19 backdrop in mind and the government will need to revisit the policy or face disastrous consequences, manifesto promises aside.
“The state pension formula, which sets increases at the highest of price inflation, average earnings growth or 2.5% a year, was set in a very different pre-Covid-19 age when price and earnings growth tended to be relatively stable year on year,” Cameron said.
“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.
“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 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,” he added.
