A report on the front page of Wednesday’s Financial Times has added weight to the possibility. It has highlighted a quirk of the calculation which could cost the Government dearly if no changes are made.
To understand why we need to understand the fundamentals of the Triple Lock. The increase each April is the greater of:
- Consumer Price Inflation to September of the previous year; and
- Average earnings growth.
It is the third component of the triple lock which the Treasury might be worried about.
What has happened?
What happened between the two was that the effects of Covid-19. This is both in terms of fewer hours worked and the effect of the Coronavirus Job Retention Scheme (CJRS). Both could cause earnings growth to be negative.
Negative earnings growth will almost certainly mean the 2.5% floor comes into play if the Triple Lock continues. CPI inflation is likely to be well below 2.5%. The reading for May 2020 was just 0.5% and pundits are far more worried about it going down than going up. A real term increase of perhaps 2% for pensioners could be a hard sell.
However, an even bigger problem looms. The 2022/23 uprating will be based on earnings growth in the year to July 2021. If the UK economy is closer to normal by July 2021, working hours will be higher than in July 2020. There will also not be 9.1m jobs furloughed with reduced pay. Year-on-year earnings growth could be significant.
With the State Pension set up as it is, this will feed through to higher increases. Add in the bite of the 2.5% floor in 2021/22 and real terms growth in State Pensions could be more than 5% over the next two years. An even harder sell.
What the Government has said
Before the 2017 General Election, the Conservative manifesto talked about scrapping the Triple-Lock Pension scheme. They talked about replacing it with a “Double-Lock” and removing the 2.5% increase option. The Conservatives lost their majority and the deal with the DUP confirmed Triple-Lock pensions would stay until at least 2020. Last year’s Conservative Manifesto said, “We will keep the triple lock”.
Last month Boris Johnson was pressed on the subject by the House of Commons Liaison Committee. He replied that the Government would meet all its manifesto commitments, “…unless I specifically tell you otherwise”.
State Pensions are important parts of most peoples financial planning. Whilst changes to the increases may make them more sustainable in the future, everyone should think about how this could affect them.