UK retirees are expected to see their state pension increase by just 2.5%.
The government is looking to scrap the triple lock system which sees pensions grow by the higher of inflation, average earnings or 2.5%.
According to British newspapers The Telegraph and The Times, ministers will go ahead with a 2.5% increase – lower than the 3% inflation and the staggering 8.8% average wages – only for one year.
This is because it would be difficult to justify such rises in a year of cuts and financial restraints.
Uprating state pensions according to earnings would cost the Treasury around £8bn ($11bn, €9.4bn) and approximately £3bn if the growth rate followed inflation. The bill for the smaller figure of the three would total £2.5bn instead.
The Times reported that ministers have been discussing the use of a ‘double lock’ which would get rid of the wages option from the original system.
But there are concerns that inflation could also grow significantly, following the Bank of England forecasting the consumer price index (CPI) hitting 3% in September 2021, but other people within the government believe the figure could be even higher.
The most likely option will probably be a 2.5% rise for the 2022-23 financial year, a government source told The Times, as they said it would be difficult to justify anything higher in a landscape of economic uncertainty and frozen public sector pay.
The move, however, is likely to receive strong opposition after a recent survey by Canada Life found that nearly half of UK adults (46%) want the triple lock to stay.
Discussions are still ongoing within the government and no formal decision has been made as of yet.
‘Ticking time bomb’
Jon Greer, head of retirement policy at Quilter, said: “The prime minister looks set to diffuse the ticking time bomb that is the triple lock by moving either to a two-year average for earnings growth or removing the earnings link entirely.
“While positing such a temporary change could be a political minefield, it is right to correct the earnings growth anomaly. Wages are not on the rise now because the economy is booming. They are in fact increasing rapidly purely due to technical factors, including the fact that the furlough scheme artificially supressed wages last year.
“To give pensioners an almost double-digit boost to their incomes, purely as a result of a technicality which stemmed from millions of people in the UK reducing their hours or stopping work altogether would seem obtuse from an intergenerational fairness perspective.
“Two potential fixes have been floated: tweak the lock by moving to a two-year average figure for earnings growth or to scrap the earnings link entirely. Those in receipt of the state pension will be hoping for the former as it may provide a bigger boost to their income next year, but a cash-strapped chancellor might well choose the latter.
“Using a two-year average figure will save the government £4.1bn compared with if they continued with an 8% increase. Using a 2.5% figure would save £5bn compared to the 8% increase. The extra £0.9bn saving may well appeal to Sunak.”
