The “triple lock” on pensions should be temporarily reduced to a double lock in order to prevent a one-off surge in earnings putting extra pressure on already stretched public finances, the head of an influential committee of MPs has said.
Mel Stride, the Conservative chair of the Treasury select committee, said one way out of the government’s pensions headache would be to suspend the link with wages in 2021.
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The Treasury has admitted that the triple lock – which stipulates that pensions must rise by the rate of inflation, average earnings or 2.5%, whichever is greater – could lead to an 18% increase in payments in 2022, owing to the expected bounceback in the pay of workers next year.
The figure is based on forecasts from the Office for Budget Responsibility and shows that earnings will fall by more than 7% this year as a result of people being furloughed but will jump back up in 2021 as full-time work resumes.
Stride said a solution would be to raise pensions by either the rate of inflation or 2.5%, even though this would mean breaking a pledge made in the 2019 Conservative party manifesto.
“The pensions triple lock will produce unintended consequences in its current form,” he said. “This is largely due to the fact that in 2021 there will be a very significant increase in average wages relative to the level this year, which will have been depressed by millions of workers on furlough.”
Stride said inflation – currently 0.5% – was significantly lower than expected before the Covid-19 crisis and would take some of the pressure off living costs.
“The chancellor will need to address the lock by carefully balancing the importance of protecting the income of older people, who often have limited opportunities for increasing their earnings, against the impact on the public finances,” Stride added.
Groups representing pensioners have said the triple lock, which was introduced in 2010, is important because the UK state pension is ungenerous when compared with the financial support provided to older people in other developed countries
“A way forward might be to temporarily suspend the wages element of the lock,” Stride said. “This might not entirely conform to the Conservative party manifesto but I think most people would recognise that a potential double-digit percentage increase is unrealistic.”
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