The state pension triple lock ensures that the value of state pension increases by the higher of three factors, which are inflation, average earnings growth, or 2.5 percent. It has been in place since 2011, but the Government announced on Tuesday that it would be temporarily suspended next year.
Due to the financial impact of the COVID-19 pandemic, it appeared that state pension would have to increase by more than eight percent under the triple lock policy, as average earnings had exploded following the wind down of the furlough scheme.
That will now not happen, leaving pensioners with less money than they expected to have. However, Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown said that such a steep increase would not have been fair to taxpayers.
She said: “Such a move will no doubt disappoint pensioners, who could have been in line for an inflation busting increase to their state pension of more than 8 percent under the triple lock.
Tom Selby, senior analyst at AJ Bell echoed those sentiments and outlined the financial implications of honouring the triple lock in this case.
“It’s worth noting the cost of the state pension triple-lock risked ballooning if, as expected, average wages come in at 8 percent or higher for the three months to July,” he said.
“The Office for Budget Responsibility estimates every one percentage point increase in the state pension costs the Treasury about £900 million. This would imply a cost of £7.2 billion compared to freezing the state pension at the current level, versus a £2.25 billion cost if it is uprated by 2.5 percent.”
“While the Prime Minister may have just come off a few pensioners’ Christmas card list, it is right that the earnings growth anomaly has been corrected.
“The triple lock was tweaked once already to ensure that pensioners received a fair deal. The Government introduced new legislation last year to ensure state pensions were uprated by 2.5 percent in recognition of their manifesto promise and commitment to pensioners – at a time when inflation was a mere 0.5 percent and earnings were falling due to the furlough scheme. Now it’s gone the other way, it’s only right that the government reacted.”