An industry think tank has said that replacing the pensions triple lock with “earnings smoothing mechanism” could save up to £15bn ($19.56bn, €16.59bn) from the covid-19 bill.
But the Pensions Policy Institute (PPI) added that this would reduce average state pension income by 2% from 2021.
The triple lock means the state pension increases by the highest of the increase in average earnings, inflation or 2.5%.
This comes as rumours continue over the future of the pensions triple-lock, with chancellor Rishi Sunak reportedly looking to scrap it to fund the coronavirus bill.
The PPI said the UK could move to earnings smoothing mechanism to inflate the state pension for earnings over 2020 and 2021, before returning to a triple or double lock in 2022.
This would mean that a spike in earnings inflation in 2021 would be less likely to result in a dramatic increase in the cost of the state pension, and could save around £15bn.
Under the triple lock, average pensioner incomes could reach up to 31% of national average earnings by 2040. This compares to up to 30% under a double lock and up to 29% under smoothing for one year.
Daniela Silcock, head of policy research at the PPI, said: “The UK government is reportedly considering replacing the State Pension inflationary mechanism, the triple lock in order to reduce government expenditure and make the covid-19 Bill more affordable. News reports originally indicated that the government was considering replacing the triple lock with a double lock.
“However, it has become increasingly clear to economists that changes in employment, arising from covid-19 are likely to result in spikes in earnings inflation in 2021, which would mean that a double lock would not save any money on the state pension bill in that year.”
Balancing act required
Moira O’Neill, Head of Personal Finance, interactive investor, says: “The triple lock formula was devised pre-covid and it does need a fresh look to iron out any anomalies that may be introduced by our unprecedented economic circumstances.
“But a delicate balancing act is required. Pensioners need protection, but it is impossible to justify a disproportionate increase in state pension, which would leave a bitter taste in the mouths of the working populace who will have to foot the bill through National Insurance and raises questions around intergenerational fairness.
“And that’s before any other tax hikes, which younger generations will likely bear the brunt of long term. Intergenerational fairness is a big issue that has huge potential to get even bigger.”
Current form not an option
Jon Greer, head of retirement policy at Quilter, added: “The triple lock has worked well in reversing the relative decline in the state pension so that it has made up much of the ground it had lost relative to earnings during the 1980s and 1990s.
“However, once the furlough scheme ends later this year and if wages recover, the current triple lock will provide a considerable boost to the level of state pension at a time when many are out of work and the government struggles to control the deficit. This is untenable both in terms of its fiscal sustainability and intergenerational fairness.
“A long-term solution is required to recalibrate state pension incomes if the triple lock is to be removed. This could include proposals to replace the triple lock with a ‘smoothed earnings link’ to provide a link to long-term wages while offering protection in periods of high inflation.
“Maintaining the triple lock in its current form is simply not an option. The government should use this opportunity to carefully consider the merits of moving to a long-term solution so that pensioners share in the proceeds of economic growth, whilst protecting their income against inflation and ensuring intergenerational fairness”.