Sunak should ‘step away’ from pension triple lock says Gauke
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The move would cost £8billion and see the state pension increase by £822 in 2022 because of the government policy to raise the benefit to match inflation, earnings growth or 2.5 percent, whichever is highest. Today official figures put growth in average annual pay at 8.8 percent for the three months to June 2021.
The triple lock promise requires the chancellor to match this figure, which has rocketed due to the recovery in wages following the pandemic.
The state pension – currently £179.60 a week – would have to rise to £195.40 or £10,160 a year to keep this pledge.
However, speculation is rising that the bill is unaffordable and that Chancellor Rishi Sunak will ‘smooth’ the link to earnings in favour of a lower figure effectively ditching the triple lock promise.
Pension experts warned that he is running out of time as next year’s state pension increase must be set on figures to be reported next month.
Ian Browne, pensions expert at investment group Quilter, said: “The triple lock is a ticking time bomb for the Chancellor, and time is quickly running out for Mr Sunak to make one of the most contentious spending decisions of a generation.
“Does he risk jeopardising the grey vote by tweaking or scrapping the lock to save a pretty penny, or does he hold fast on the lock and give pensioners a seismic boost to their income despite the controversial cost?
The move would cost £8billion and see the state pension increase by £822 in 2022 (Image: PA Images)
“Assuming earnings growth remains at 8.8 percent, the triple lock will increase the cost of the state pension by £8bn, a staggering £5.7bn more than if it increased by 2.5 percent.”
Mr Browne suggested the Chancellor might ‘tweak’ the triple lock this year by moving to a three-year average figure for wage growth in order to smooth the temporary spike caused by the end of the furlough scheme.
This would increase the state pension by 3.9 percent next year, and would save the Treasury £4.5bn.
The growth in earnings is so high due to mass redundancies, wage cuts and furlough caused a steep fall in average earnings 12 months ago.
The rate could be even higher in September, which will dictate what is used to uprate pensions in April 2022.
Steven Cameron, of Aegon, the pension provider, said: “If this trend continues, we could even go into double figures, meaning if the triple lock is not fudged in some way, state pensions could go up by more than 10 percent.”
This would cost the Treasury up to £9bn, he estimated.
For a second month running, the Office for National Statistics published “underlying” earnings data, which stripped out the abnormal effects of the pandemic.
The lower figure was between a range of 3.5 percent to 4.9 percent.
Using this lower “underlying” figure would only increase the state pension by £327 and save the taxpayer £3.5bn, according to calculations from AJ Bell, the stockbroker.
However, it would deny 12.4m state pensioners a record boost and someone turning 66 this year would be £11,866 out of pocket by age 85.
Smoothing the triple lock would open the Government to criticism for breaking the triple lock mechanism – a 2019 Tory Party manifesto pledge.
Julian Jessop, economics fellow at think tank the Institute of Economic Affairs, said: “The 8.8 percent jump in average pay in the three months to June provides more ammunition for those arguing that the ‘triple lock’ on the state pension needs to be unpicked.
“The July figure, which would normally determine the pension increase next April, is now also likely to be well above eight percent.
”Each one percentage point increase in earnings growth will add around £900m to annual spending on state pensions, next year and in future years.
”The pay data have been distorted by the pandemic in ways that no-one could have anticipated.
“Unless the triple lock is changed, this will provide an unintended windfall to pensioners that is increasingly hard to justify.
Sarah Coles, personal finance analyst, Hargreaves Lansdown, said: “The fact that most people haven’t seen anything like this kind of pay rise is bound to raise the issue of fairness between those who are working and those who are drawing their pensions.
“It makes some kind of smoothing out of the wage measure in the triple lock even more likely.
“If the government sticks with the triple lock, wage rises will mean pension rises of close to 10 percent.
“This would be a striking contrast to the 2.8 percent that essential workers in the public sector have seen over the past 12 months.”
However, even if the State Pension were to increase by eight percent there would still be a £730-a-year income gap compared to the Joseph Rowntree Foundation’s Minimum Income Standard, new analysis from retirement specialist Just Group shows.
A spokesman for HM Treasury said: “The state pension has risen by more than a third since the triple lock came into effect in 2010 – with the government forecast to spend around £105bn on it this year.
”We will continue to support older people while ensuring future decisions are fair for both pensioners and taxpayers.
Comment by Steven Cameron
These figures show yet another sharp rise in earnings growth, just one month before the figure used for the state pension triple lock is published.
The earnings component of the triple lock uses the three-month average increase to July and with only one month to go, the increase to June is sitting at 8.8 percent up from 7.4 percent the previous month.
If this trend continues, we could even see the July increase go into double figures, meaning if the triple lock figures are not adjusted in some way, state pensions could go up by more than 10 percent.
While price inflation is on the rise, with the Bank of England predicting it could reach four percent later this year, a 10 percent increase in state pensions would represent a boost of six percent above inflation.
This will surely increase pressure on Chancellor Rishi Sunak to find a fair way of adjusting the earnings component to strip out the distortions caused by the pandemic.
The furlough scheme meant many individuals saw a cut in earnings around a year ago, which is now leading to inflated increases as furlough ends.
The extent of the distortions caused by furlough are reflected in the different increases between the private and public sectors.
The increase in the private sector was 10.1 percent compared to 2.8 percent in the public sector, with a much greater proportion of private sector employees having been furloughed.
The ONS suggests underlying earnings growth with pandemic distortions removed might be between 3.5 percent and 4.9 percent.
Mr Sunak could argue using an underlying growth figure in this range reflects the intentions behind the triple lock, with the upper figure also providing an increase likely to exceed price inflation.
The chancellor has indicated that any decisions to put the UK’s finances back on a sounder footing post-pandemic will need to weigh up the interests of different generations.
The State Pension is paid for by National Insurance contributions of today’s workers, so the government will face a difficult balancing act.
The triple lock costs the government around £0.9bn for every one percent rise.
An eight percent increase would cost around £7bn next year and in every future year while a 10 percent increase would add almost a further £2bn.
There will be questions around intergenerational fairness if state pensioners receive what could be a double digit increase, paid for by today’s workers, which is far above the pay rises those workers will typically have received.
- Steven Cameron is the Pensions Director at Aegon
The former police officer says paying an £8bn bill is just not realistic after pandemic (Image: nc)
Raymond Jackson, 88
Raymond who lives in Peterborough, thinks the Chancellor will have no choice but to ‘fudge’ the figures when it comes to raising the state pension.
The former police officer says paying an £8bn bill is just not realistic in the aftermath of the Covid pandemic.
“I think the triple lock is a good policy. I have a decent pension after 30 years of service but lots of people my age don’t and they rely on the State pension, which is not large and needs to be protected,” he said.
“I know it’s an expensive policy but pensioners pay into the State pension all their working lives so they should be looked after when they can’t work any longer.
“However no one could have predicted a global pandemic with the furlough scheme and redundancies and then a huge boost to pay when people went back to work.
“The rise also wouldn’t be just for one year, all the following rises would be higher because they’re based on the next rise and that would be unsustainable.”
The father of three, grandfather of two and a great grandfather of two was also concerned about younger workers.
“I think there are a lot of people raising families and paying mortgages and they’re the ones needing the extra money,” he said.
“I think Mr Sunak will end up fudging the triple lock figures and coming up with a less generous state pension increase.”