Senior Conservative Says U.K. Could Suspend Pensions Lock
Senior Conservative Says U.K. Could Suspend Pensions Lock
(Bloomberg) -- The U.K. government should consider suspending part of its flagship pensions guarantee, one of Boris Johnson’s most politically sensitive election promises, according to the chairman of the influential Treasury Committee.
The pensions triple-lock -- a pledge to raise the state pension every year by whatever is highest out of the annual growth in average earnings, inflation, or 2.5% -- looks set to produce “unintended consequences” in the wake of the coronavirus, Conservative lawmaker Mel Stride said Friday.
The cost of the policy is threatening to spiral thanks to the impact of the government’s furlough plan to support workers through the crisis -- which could see wages drop this year, only to shoot up by almost a fifth in 2021. A large increase in pensions, which already cost the government about 100 billion pounds ($126 billion) a year, could also trigger questions over intergenerational fairness at a time when young workers’ jobs are particularly at risk.
“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 recognize that a potential double-digit percentage increase is unrealistic.”
The policy has come under scrutiny after Office for Budget Responsibility forecasts showed wages would rise 18.3% in 2021 -- an outcome that would see pension payments soar.
Key Promise
Officials are aware that the pensions triple lock, promised by the last three Conservative prime ministers as a guarantee that retirement incomes will keep rising, may have to be reviewed, a person familiar with the matter said. Even so, earlier this week, a government spokesman said the prime minister has “no plans” to abolish the triple lock.
The actual rise in earnings may turn out to be more benign for the Treasury. When the OBR compiled its forecast in April, it was unclear how the government’s furlough program would be treated by statisticians, and the predictions assumed payments wouldn’t be classified as earnings -- leading to the steep drop this year and subsequent rebound in 2021.
Since then, the Office for National Statistics confirmed its data, which is fed into the triple lock, would treat the support as wages, meaning any fall in 2020 and recovery the following year will likely be much smaller.
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