Currently, the state pension rises annually under the triple lock mechanism. It means that both the basic and new state pension increases each April by whichever is the highest out of the average percentage growth in wages in Great Britain, the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI), and 2.5 percent.
Upon seeing the data, Steven Cameron, Pensions Director at Aegon, commented on implications for the state pension triple lock.
The figures show average total earnings dropping by 1.2 percent, with the furlough scheme being reflected in the latest data, the Pensions Director said.
This is something which Mr Cameron suggested would put pressure on the state pension triple lock and its guaranteed 2.5 percent increases.
But with inflation well below one percent in the current unprecedented times, the 2.5 percent underpin could well come at a high cost.
The triple lock is something which Boris Johnson’s Conservative party recommitted to in last year’s Manifesto.
Mr Cameron went on to warn that should current falls in earnings be followed by sharp increases, state pensioners could be on track for a record increase in future years.
As such, the current system could mean pensioners are protected by the 2.5 percent this year, followed by a “windfall boost” in the following year.
While this particular possible outcome could be good news for recipients of the state pension, it would come at a “very high” cost.
In 2018/19, the Government spent £95.5billion on state pensions, meaning every one percent increase adds around £1billion to the bill – for that year and all future years.
But with no fund built up to pay for future state pensions, it’s paid for from the National Insurance Contributions of today’s workers.
However, as Mr Cameron pointed out, for many elderly people, state pensions are a lifeline – meaning the Government may face “tricky decisions” ahead.
Steven Cameron, Pensions Director at Aegon commented: “For many, the state pension is their main source of income in retirement, and the triple lock has proved valuable in making sure their purchasing power keeps pace with both price increases and wage growth with an underlying 2.5 percent guaranteed increase.
“But with the fallout of COVID-19 meaning price inflation looks set to remain below one percent for some time and national average earnings falling rather than rising, the fairness and affordability will come under question.
“The Chancellor, preparing for his Autumn Budget, will be alert to this.
“A 2.5 percent increase next April would cost the Government almost £2.5billion, not just in the coming tax year but in all future years.
“And if the earnings component is kept as is, there’s a high chance of a record increase in state pensions the following year with an even greater price tag.
“This raises major issues around how to share the cost of repairing the nation’s finances across generations.
“While cutting back on the state pension triple lock would save billions, it would be highly unpopular with state pensioners.
“The Chancellor might decide to swallow the cost of a 2.5 percent increase in 2021 but may need to change the way earnings increases are reflected, either suspending this component or temporarily averaging out earnings increases over two or more years until they stabilise.
“Any changes to state pensions also need [to be] viewed alongside the huge sums being spent on initiatives for those of working age.
“The furlough scheme is expected to cost £69billion, the bonus for keeping workers on after furlough up to a further £9.4billion and there’s a predicted £2.4billion price tag for the kickstart scheme for under 25s.
“However, these schemes are one offs and unlike state pension increases, don’t lock the Government into additional spend in future years.
“If the Chancellor is planning any changes to state pensions, the sooner these are announced the better.
“With many pensioners needing to get by on fixed incomes, it’s vital they know well in advance what to expect and are not left disappointed if expectations aren’t met.”
Published at Tue, 11 Aug 2020 15:51:01 +0000