Triple lock could increase state pension costs in 2024/25 by £6bn more than if CPI-linked

The triple lock could result in state pension spending in 2024/25 being £6bn more than if it was raised in line with CPI inflation, according to figures from the Office for Budget Responsibility (OBR).

Referencing its central scenario, the OBR’s Fiscal Sustainability Report said the triple lock could result in £3.2bn more state pension spending than if it were earnings-linked and £1.8bn more than if there was a 'double lock' system based on the two factors.

“These figures equate to between 0.1 and 0.2 per cent of GDP. This illustrates the fiscal risk posed by the triple lock’s upward ratchet and its propensity to exacerbate demographic spending pressures over the long term,” said the report.

Accordingly, the OBR’s medium-term forecasts now see the state pension accounting for between 4.9 and 5 per cent of UK gross domestic product, above its previous estimate of 4.7 per cent.

AJ Bell senior analyst, Tom Selby, pointed out that this is not perhaps as disastrous as it might have been, as “previous OBR projections suggested the UK’s economic lockdown could see average earnings crash by 7.3 per cent in 2020 before rebounding 18.3 per cent in 2021”.

This would have seen the state pension leap by 21 per cent over two years as it climbed by its minimum amount of 2.5 per cent and then matched earnings growth of 18.3 per cent.

Selby added: “While clearly maintaining the triple lock would be good news for pensioners - and potentially provide a bumper income increase in 2022 - it remains an odd policy which should be reviewed. Randomly ratcheting up the real value of the state pension without ever saying what the target value is makes little sense.

“Furthermore, recent events have shown that in extreme economic circumstances the Treasury faces the risk of being left footing a massive state pension bill.”

Elsewhere in the OBR’s report, the economic hardships faced by employers mean that the Pension Protection Fund (PPF) is now predicted to face annual costs £0.2bn higher than previously predicted in OBR’s central scenario, with the downside scenario seeing this amount increase to £0.5bn per year.

The report stated: “Since its inception, the PPF’s investment and levy income has typically exceeded its outgoings. But in 2011/12, in the aftermath of the financial crisis, the PPF added £0.5bn to public borrowing, as it recorded £1.2bn in public spending taking on the pension liabilities of failed companies.

“Our downside scenario assumes an additional £0.5bn a year cost of taking on such liabilities relative to our March forecast, but considerably higher figures would be possible in some scenarios.”

Looking to the short term, the figures showed that state pension spending could be £1.9bn lower between 2021/22 and 2024/25 than previously forecast due to 60,000 excess deaths from the coronavirus crisis.

The central scenario presented in the OBR’s report judged that excess mortality would send state pension spending for 2020/21 £0.6bn lower than had been predicted back in March, while new estimates showed reductions of £0.4bn, £0.3bn and £0.2bn for 2021/22, 2022/23 and 2023/24 respectively.

Meanwhile, the central scenario showed that triple lock costs for 2021/22 are now expected to be £0.5bn lower than had previously been thought.

Even so, because of unemployment and new policy measures overall, government spending on social benefits in 2020/21 is now expected to be £33.6bn higher than March forecasts, with the difference lessening in each year that follows.

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