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The government on Tuesday said it would, for one year, break the earnings link in the state pensions triple lock to avoid reflecting a pandemic-related bounce-back in earnings of an expected 8% to 8.5%.
With earnings having been predicted to rise substantially after being suppressed by lockdowns, a temporary move to a double lock had been expected. The removal of the earnings link means state pensions will only be uprated in line with the higher of inflation or 2.5% for a year.
The government said it had considered the fairest approach for both pensioners and younger taxpayers, saying that an earnings increase of between 8% and 8.5% would have added about £4bn to £5bn in basic and new state pensions expenditure in 2022/23, when comparing with the higher of 2.5% or expected price inflation. Since 2010, the full yearly basic state pension has increased by over £2,050 in cash terms, improving a state pension that is among the very lowest in Europe.
“Younger people have been hit hardest by the financial impacts of the pandemic, and the artificial inflation of pensioner incomes at this time would be out of kilter with the pressures being experienced by the rest of the population,” the Department for Work and Pensions said, calling the earnings increase a “statistical anomaly”.
It added that the government plans to return the earnings element of the triple lock next year.
Industry wants to see longer-term reform
Most in the industry seem to agree with the government’s view that religiously sticking to the rule would not be appropriate in this instance but point out longer term issues.
“We understand the current focus on addressing a one-off distortion of the triple lock for pensions comes as a result of Covid-19,” said Louise Pryor, president of the Institute and Faculty of Actuaries.
“However, we believe that this should not divert attention away from the need for a longer term reform to embed fairness for all generations. Irrespective of immediate measures to address Covid-19 anomalies, it remains crucial as today’s workers become tomorrow’s pensioners, that the State Pension remains fair and sustainable over the long term,” she added.
Many within the pensions industry have argued that the triple lock would be impossible to sustain indefinitely, "so perhaps today’s announcement should be regarded as an acceptance of the inevitable", said Tim Middleton, director of policy and external affairs at the Pensions Management Institute.
"Time will tell if the planned restoration of the earnings-related element will indeed actually happen. However, all those who remain passionate about pensions will remain committed to further development of our system to ensure that the retired are guaranteed a secure and comfortable lifestyle.”
Breaking the triple lock – even just temporarily – could potentially make it easier to cross the Rubicon again at a later date, suggested Ian Neale, co-founder of policy specialists Aries Insight.
The reduction to a double lock for 2022/23 was widely predicted, he noted and is unlikely to come under attack because of the nature of the earnings increase.
“However, it prises open something hitherto accepted as sacrosanct, making it easier to repeat the action of amendment if in future inflation should double, for example. The power of precedent should not be underestimated,” he said.
Neale also predicted that pensioners will feel less trusting at future elections, pointing out that the over-66s represent a growing proportion of the electorate.