The Government’s £34 billion decision on the state pension triple-lock

•    AJ Bell analysis reveals how state pension triple-lock costs could balloon if the UK economy recovers rapidly once the COVID-19 lockdown ends
•    Latest official Office for Budget Responsibility (OBR)* forecasts point to a 7.3% fall in average earnings in 2020, followed by an 18.3% increase in 2021 if the economy recovers rapidly
•    OBR* also predicts inflation will be 1.2% for 2020 before creeping up to 2.3% next year
•    Applying these figures to the state pension increases for the following two years:
o    With the triple-lock in place, the flat-rate state pension would increase 21.3% in value over the next two years (2.5% in 2021 and 18.3% in 2022), from £175.20 a week to £212.45 a week
o    If the state pension rose in line with average earnings only, it would increase 9.7% in value over the next two years (-7.3% in 2021 and 18.3% in 2022), from £175.20 a week to £192.15 a week
o    If the state pension rose in line with the OBR’s inflation prediction only, it would rise by just 3.5% (1.2% in 2021 and 2.3% in 2022) to £181.40 by 2022

Tom Selby, senior analyst at AJ Bell, comments: 

“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.

“Based on previous OBR costings and its own estimates for inflation and earnings, retaining the triple-lock for 2021 and 2022 would cost over £22 billion more than a straight average earnings link, and a staggering £34 billion more than if it were only protected in line with inflation**.

“The Government has two options open to it: carry on with the state pension triple-lock and create a colossal chasm in the public finances, or revisit the policy and risk the wrath of millions of pensioners.”

*https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/886552/Forecomp_May_2020.pdf
See table M3 for the CPI inflation estimate and Table M6 for average earnings (OBR figures at the bottom of each table).

**Estimated triple-lock costings based on OBR ‘Welfare trends report’ published in June 2015 (p50, paragraph 2.62: https://obr.uk/docs/dlm_uploads/49754-OBR-Welfare-Accessible-v0.2.pdf). The OBR estimated the cost of increasing the state pension by CPI inflation (2.7%) was £2.9billion compared to increasing by average earnings (1.2%). This suggests increasing the state pension by an extra 1.5 percentage points cost the Exchequer £2.9billion (in 2014/15 terms).
llion