Triple lock could push state pension up by 21.3% by 2022 - WTW

Triple locked state pensions could rise by as much as 21.3 per cent over a two-year period if there is a V-shaped economic recovery, according to analysis by Willis Towers Watson senior consultant, David Robbins.

Robbins warned that lockdown lifting could see a significant pension rise in 2022 under the current uprating policy, if average earnings growth was negative in 2020 and strongly positive in 2021.

Employees that were furloughed and received a 20 per cent reduction in earnings during lockdown before reverting to their original pay once the Coronavirus Job Retention Scheme concludes could exacerbate this issue.

He added that the consequences of the pandemic on average wage growth might also call current policy into question.

Due to a combination of average wages falling in 2020 before rising in 2021 and GDP recovering faster than employment, an Office for Budget Responsibility (OBR) scenario showed that average earnings could fall by 7.3 per cent in 2020 and rise by 18.3 per cent in 2021.

Robbins noted that if these are applied over the 12 months of May-July, triple locked pensions would rise by 2.5 per cent when wages fell and by 18.3 per cent when the rose again.

Therefore, Robbins explained, triple locked state pension would have risen by 21.3 per cent, while wages would have increased by 9.7 per cent.

He clarified, however, that this level of growth, which was based on scenario-planning from the OBR, was only one possible scenario, stating that “other, far less dramatic” scenarios are possible.

For example, the Bank of England predicted that average earnings could fall by just 2 per cent in 2020, and rising by 4 per cent in 2021, whilst others disagree with the idea of a V-shaped recovery completely.

Robbins warned that if ministers want to prevent the current policy from “significantly and suddenly” increasing state pension relative to earnings without changing the law, it could perhaps look to freeze weekly pensions in April 2021, if earnings growth were negative.

However, he clarified that, to avoid increasing pensions in line with rebound earnings, they will probably need to change primary legislation.

He added that whilst the government could also seek legal advice on precisely what the current law requires them to do and look for some flexibility, a change in law would be “more transparent and less open to challenge”.

One potential option highlighted by Robbins was a “modified triple lock”, which would see pensions rise at least in line with inflation, and by at least a given cash amount or percentage.

In this modified system, they would also never be lower than if they had been indexed to earnings from a suitable starting date.

Robbins explained: “If the government wanted to continue to meet the three objectives that the triple lock scores well against but without progressively ratcheting up the value of state pensions relative to earnings over time, one option would be a modified triple lock.

“Provided that earnings grow faster than prices over the long term, any increases in pension values relative to earnings in individual years would then be temporary."

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