Interactive Investor

Is ‘smoothing’ the triple lock the answer to the state pension problem?

8th September 2020 16:21

Moira O'Neill from interactive investor

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Our head of personal finance shares her view on the Pensions Policy Institute’s proposal for keeping state pension costs down in 2021.

The Pensions Policy Institute (PPI) think tank has today issued a briefing note exploring the potential impact on the government and on pensioners of moving from a triple lock to a different measure of inflation.

The key points:

  • The PPI suggests an earnings smoothing mechanism to inflate the state pension, which, for example, uses the average for earnings over 2020 and 2021 (before returning to a triple or double lock in 2022). This 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 £15 billion.
  • Under the triple lock, average pensioner incomes could reach up to 31% of national average earnings by 2040, according to the PPI.
  • This compares to up to 30% under a double lock and up to 29% under smoothing for one year.

Moira O’Neill, head of personal finance, interactive investor, says: “The triple-lock formula was devised pre-Covid and it does need a fresh look to iron out any anomalies that may be introduced by our unprecedented economic circumstances. But a delicate balancing act is required. Pensioners need protection, but it is impossible to justify a disproportionate increase in state pensions, which would leave a bitter taste in the mouths of the working populace, who will have to foot the bill through National Insurance and raises questions around intergenerational fairness. And that’s before any other tax hikes, which younger generations will likely bear the brunt of long term. Intergenerational fairness is a big issue that has huge potential to get even bigger.

“This is an issue that shows no signs of going away as the true cost of the Covid-19 crisis starts to filter through. I think some of the suggestions put forward around smoothing, for example, a two-year averaging policy, seem a sensible approach.”

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