When the UK government decided to scrap the earnings growth component from the pensions triple lock for 2022-23, it mentioned a covid-induced anomaly which bloated the figure to over 8%.
This means that in April 2022, state pensions will rise by 3.1% – as increases under the ‘double lock’ are linked to either inflation or 2.5%, whichever is highest.
Earlier this week, secretary of state for work and pensions Therese Coffey reiterated the government’s commitment to reinstate the triple lock in the next financial year, 2023-24.
But in his Spring Statement on 23 March 2022, chancellor Rishi Sunak said that inflation for 2022 will average at 7.4%, which means there could be a risk that Consumer Price Index (CPI) figures for September 2022 – the ones used for triple lock purposes – may exceed 8% like in 2021 for earnings growth.
At the time, the Treasury claimed an 8.8% increase to state pensions would have not been sustainable. So, if inflation does hit or even surpass 8% in September, can the government scrap its commitment yet again and replace inflation with earnings growth to maintain a double lock for yet another year?
The Department for Work and Pensions declined to expand on Coffey’s comments, so International Adviser reached out to industry players to understand the likelihood of a second ‘double lock’ scenario.
Steve Webb, partner at LCP, said: “Worth saying that this year’s ‘double lock’ ignored the earnings figure and used the higher of inflation and 2.5% – hence the 3.1% increase. So, a double lock involving inflation or 2.5%, would still give you 8% or so next April.
“Earnings growth may be a bit lower but will still be large, so I think either way we get a big state pension rise next April – mainly a catch-up on the substantial under-inflation increase this year.
“I think there would be political uproar if they suspended the triple lock for a second year. Whereas last year they could argue that the earnings figure was a statistical ‘quirk’ caused by the pandemic, the inflation figures are a real reflection of soaring cost of living.
“I don’t think they would have any justification for not doing an inflation link for the April 2023 uprating. They recommitted to the triple lock this week, despite knowing that inflation would be very high by the Autumn.”
Steven Cameron, pensions director at Aegon, believes that the triple lock system has become problematic since it was designed “when we had relatively stable inflation and earnings growth which were both expected not to diverge too far from 2.5%”.
But that came crumbling down in 2021 with the impact of covid on the figures, and with the chancellor claiming that inflation will not go down until at least 2024.
Cameron said: “Last year, it was the national average earnings growth which had rocketed, and that was distorted by people having been on furlough the year before. It wasn’t really an indicator of what an average person had seen happen to their earnings and in fact, many who had seen significant increases last year were only recovering from a cur the previous year.
“So, I supported not giving 8.8% last year, albeit I would have gone for a form of averaging over two or more years rather than moving to the double lock. I’d say it was less about affordability and more about fairness between workers, whose National Insurance pays state pensions, and pensioners.
“Looking ahead, it’s price inflation that is expected to exceed 8% in next year’s triple lock calculation. Pensioners have lost out on recent inflationary rises because the formula uses inflation to September.
“I think it would be far harder to justify cutting this back in any way next year. If pensioners receive an increase below inflation over time, then they are definitely suffering from less purchasing power. Yes, an 8% increase next year will be costly, but it will largely be a ‘catch up’ from an increase this year which is half the current rate of inflation.”
According to LCP, if inflation follows the Office for Budget Responsibility’s forecasts, and the government sticks to its commitment of restoring the triple lock, state pensions should increase by 7.5% in April 2023, and then by 3.4% the following year.
Webb said that 7.5% would be “biggest ever cash rise in the value of the state pension”, but he added the problem is “that ‘jam tomorrow’ will not pay bills today”.