A respected pensions think tank has claimed that ‘smoothing’ the mechanism of the UK’s triple lock pension system would be better than switching to a double lock and would still save £15 million.
Concern has been expressed that the effect of the coronavirus pandemic could play havoc with the current triple lock system because of the wild swings expected in average earnings.
Average pay packets are expected to fall by 7% this year because of job losses and the government furlough scheme paying 80% of the wages of 9.6 million people.
But the Office for Budget Responsibility (OBR) is predicting wages will rise by a huge 18% next year as the economy recovers and the furlough scheme is ended.
Under the triple lock system pensions would be forced to rise by 18% as they are calculated by applying whichever is the greater of earnings growth, inflation or 2.5%.
Many experts have suggested dropping the earnings element to leave a double lock system based on either the rate of inflation or a standard 2.5% rise.
But the Pensions Policy Institute (PPI) claims that such a change would not save the country any money whereas a ‘smoothing’ of the current system could save as much as £15 billion in 2022/23.
Their figures show that under low inflation conditions the cost of a double lock would be a maximum of 5.1% of the country’s gross domestic product (GDP).
But if the government introduced a smoothing mechanism which restricted the overall cost of the triple lock to a rise of 4.6% it could save £15 billion over two years.
PPI spokeswoman Daniela Silcock said: “Using an earnings smoothing mechanism to inflate the state pension, which, for example, used the average for earnings over 2020 and 2021, (before returning to a triple or double lock in 2022) 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.
“Changing the state pension inflation mechanism would also mean that pensioner incomes do not increase as quickly.
Average pensioner incomes
“Under a triple lock, average pensioner incomes could reach around 31 per cent of national average earnings by 2040, compared to around 30 per cent under a double lock and 2 per cent lower at around 29 per cent under the use of a smoothing mechanism in 2021, followed by a return to the triple lock.”
Aegon UK suggested a smoothing mechanism in August, suggesting the triple lock should be calculated over two years rather than just one which would average out any earnings growth. But the PPI warned that whatever option was taken it would require a change in legislation to make it happen.