- Chancellor of Exchequer Rishi Sunak is under pressure to suspend triple lock on pensions due to increasing cost of borrowing amid the pandemic.
- The Boris Johnson government in their 2019 manifesto promised to continue raise the state pension in line with average earnings.
- This guarantee could leave the Treasury with an additional pension bill of £4 billion.
Prime Minister Boris Johnson and Chancellor of Exchequer Rishi Sunak were seen to be locked in a bitter row as the borrowing costs increase due to the pandemic, leading to fear in the minds of savers regarding the safety of their retirement income. This is happening amid the recent reports that the pensions triple lock guarantee could be ditched for a year or two, to cover the huge costs due to the catastrophic impact of Covid-19 on the economy.
The Boris Johnson government in their 2019 manifesto promised to continue raising the state pension in line with average earnings, the annual inflation rate or 2.5%, whichever is higher. The government would face a massive backlash if this key manifesto pledge is ditched. But increasing inflation as well as growth in earnings may result in a burden of an additional pension bill of £4 billion on the Treasury. According to the chancellor, a post-lockdown surge in pay growth would result in the state pension going up by 8% in April 2022.
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The Office for Budget Responsibility added that the earnings growth will be artificially inflated this year as the restriction imposed on the economy would ease, and it is actually being boosted as people being placed on furlough are gradually returning to work. The spread of Covid-19 pandemic led to loss of both jobs and wages. However, the official wage figures are artificially inflated due to the pandemic, and thus, a new formula is essentially needed to bring more accuracy in the calculation of a rise in the basic state pension applicable for the next year. As inflation is anticipated to hit 4% this year, Sunak said a final decision regarding pension payments will be out by autumn.
Reasons why the pensions triple lock should stay
A major threat is faced by triple lock as wages are now the highest of the three, jumping up by 8.8%. This will exert a lot of pressure on the treasury. However, according to new research of Canada Life, which is an insurance company, almost half of UK adults want the triple lock to stay in place, with people above the age of 50 wanting it more as compared to under 50. Older voters are more likely to get angry at the withdrawal of triple lock and lose faith in the chancellor. Thus, many pension experts believe that triple lock should continue.
As per the Organisation for Economic Co-operation and Development, the UK already offers the lowest state pension among countries in the developed world. The replacement rate is less than many developed countries, as the full flat-rate state pension offers £179.60 (US $247.27) in a week in 2021-22, which adds up to £9,399.20 in a year, which is just around one-third of the average UK salary. The average replacement rate prevailing in OECD economies is around 60%, and thus, triple lock must remain to compensate for the low state pension.
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Even if triple lock is in place, concerns have been raised that the UK residents will still not attain the minimum standard of living post-retirement. Pensioners usually don’t have alternative sources of income unlike the working population, and therefore, they are highly dependent on the state pension, which is expected to increase in real terms. Women particularly are almost entirely dependent on the state pension in old age.
Maintaining intergenerational fairness is another important reason because young people will eventually suffer if the triple lock is scrapped off, as a higher pension provision will be required to compensate for the same. A bigger state pension would be advantageous for all generations once they retire.
Rather than entirely scrapping off triple lock, the Government can make some necessary amendments to it. According to Ian Browne, a pensions expert at investment group Quilter, the spike in wages caused due to the end of the furlough scheme can be smoothened by moving to a three-year rolling average for wage growth this year. This would help in maintaining some form of intergenerational fairness, as it would save the Government £4.5 billion by increasing the state pension by only 3.9% next year.