COVID-19 may bring forward the date when the ‘poorly designed’ pensions triple lock is abandoned

Institute for Fiscal Studies recommends that, until the lock is 'unpicked', uprating in April 2021 should follow today’s 0.5 per cent inflation figure instead of the 2.5 per cent fallback rate

The COVID-19 pandemic may bring forward the date when the pensions triple lock is abandoned, according to the Institute for Fiscal Studies (IFS).

Responding to today’s inflation figure from the ONS - that show a 0.5 per cent Consumer Price Index in the year to September 2020 - which is particularly important as September’s figure is conventionally used in calculating how benefits and state pensions are to be uprated the following April, the IFS says this means the basic state pension and new state pension will increase by 2.5 per cent next April under the current government policy of triple lock indexation.

NB - the triple lock means payments increase by the greater of growth in prices, earnings, or by 2.5 per cent and, since inflation is at 0.5 per cent and earnings have fallen by an estimated 1 per cent over the year to July due to the economic uncertainty generated by the coronavirus outbreak, the 2.5 per cent figure will be used for next year's uprating.

While the IFS highlights that when there is a stable, average economy - where inflation sits around 2 per cent and earnings grow nominally - the triple lock is no more (and no less) generous than earnings-indexation, it says the triple lock becomes particularly generous to pensioners in periods of economic turmoil such as now -

‘This is because the value of the basic state pension and new state pension are protected when earnings growth is weak but, despite this, increase fully with any subsequent recovery in earnings. As a result the value of these payments would increase more quickly over time if the economy experiences periods of boom and bust rather than if the economy experiences consistent (but the same average) growth.’

Suggesting a solution to this design flaw - described as a 'smoothed earnings link' and supported by the Work and Pensions Select Committee in its 2016 report on intergenerational fairness - the IFS says its recommendation would remove the 2.5 per cent fallback in the current triple lock and initially rely on inflation figures to uprate pensions in April 2021 -

‘… next April would see state pension payments rise by today’s inflation figure of 0.5 per cent (rather than by 2.5 per cent), with growth in their value relative to average earnings being subsequently clawed back by setting future increases in line with inflation until a full basic state pension and a full new state pension returned to their pre-COVID shares of average earnings, at which point earnings-indexation would resume.’

Acknowledging that other temporary fixes may also be possible, the IFS, nevertheless, observes that the poor design of the triple lock was always going to prove unsustainable in monetary terms. With the current pandemic having brought this into sharp focus, the IFS says that it suspects that COVID-19 may well have brought forward the date at which the triple lock is abandoned.

For more information, see COVID-19 will bring forward the date when the pensions triple lock is unpicked from ifs.org.uk