State pension triple lock: revised forecasts suggest ‘stay of execution’

New figures from the Office for Budget Responsibility suggest one of Boris Johnson’s key manifesto promises can be kept.

The latest economic predictions from the Office for Budget Responsibility confirm the UK is on track to see the largest decline in the economy for 300 years, with output falling by at least 10% over 2020.

However, while the pace of recovery thereafter is extremely uncertain, the job retention schemes initiated by the government to help employees and businesses are helping to protect the economy and reduce long-term economic “scarring” “by keeping workers attached to firms and helping otherwise viable firms stay in business”.

One important aspect of this is that it may enable the state pension triple lock to be retained. Boris Johnson’s Conservative government reaffirmed that promise in its manifesto, and it was repeated by the prime minister in Parliament at the end of May.

The triple lock guarantees pensioners a state pension rise each year of the greatest of three measures: inflation, earnings growth or 2.5%.

However, experts have become increasingly vocal in their opinion that the triple lock will have to be abandoned, in part in order to save money to help pay for the fallout from the pandemic, but also as a result of anomalies in average earnings growth because of the lockdown.

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For people receiving a state pension, earlier OBR forecasts had indicated that because so many people are being furloughed or taking voluntary pay cuts in lockdown, average earnings could fall by 7.3% in 2020 – but assuming recovery in 2021, they would then soar by over 18% next year.

Those figures would form the basis of the earnings element of the triple lock system for 2021 and 2022 respectively.

Tom Selby, senior analyst at AJ Bell, explains: “This scenario could have seen the value of the state pension rise by over 21% in just two years as a result of the triple lock – a potentially unsustainable increase given the scale of public borrowing. A handout of this nature to retirees at a time when millions of workers are facing severe hardship would also have been difficult to justify.”

The latest OBR predictions – which follow three potential outcomes with different speeds of economic recovery - paint a much more restrained picture. Under the “central”or moderate recovery scenario, the triple lock 2.5% fallback would kick in for 2021, followed by a 5% rise in 2022 after earnings rebound next year. In 2023, it would rise by 2.7% and in 2024 by 3%.

That is nowhere near as out of kilter as the earlier predictions. “With volatility in average earnings growth now expected to be dampened as a result of government interventions – in particular the Coronavirus Job Retention Scheme – the chancellor may just have enough leeway to spare one of Boris Johnson’s key manifesto commitments,” Selby adds. 

Nonetheless, calculations by AJ Bell suggest that the triple lock system under this scenario would still cost the taxpayer £6 billion more than a system that simply pegged the state pension to consumer price inflation, and £3.2 billion more than if it were linked to average earnings growth.

Given the pressure on the chancellor to find ways to rebuild the Treasury coffers, he may yet take advantage of this year’s extraordinary circumstances to effect an overhaul of the system.

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