State PensionJul 7 2021

Covid earnings spike could add £3bn to state pension bill

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Covid earnings spike could add £3bn to state pension bill

State pension costs could increase by £3bn if average earnings hit 8 per cent this year, the Office for Budget Responsibility (OBR) has warned.

In its fiscal risks report, published yesterday (July 6), the OBR said if earnings growth in the three months to July is 8 per cent, this would add £3bn a year to state pension spending.

This spike in average earnings is expected in 2021 as the UK emerges from lockdown and the furlough schemes come to an end.

The period looked at by the OBR determines the triple lock uprating for next April. 

Under current triple lock rules the state pension is increased by the highest of earnings growth, price inflation or 2.5 per cent a year.

Tom Selby, senior analyst at AJ Bell, warned the average earnings element could “present a real problem to the Treasury”.

Selby said: “The state pension triple-lock wasn’t really designed for a world where average earnings increase by 8 per cent - which is entirely possible as lockdown restrictions ease and the UK economy hopefully bounces back from the lows of 2020.

“Such a dramatic increase in average earnings would cost the Exchequer around £3bn – hardly loose change, even in the context of a pandemic which has seen borrowing rise by hundreds of billions of pounds.

“Chancellor Rishi Sunak has been clear that the government intends to honour the triple-lock promise, so it may simply decide to wear this extra cost.

“If it does and average earnings rise by 8 per cent that’ll represent a boon for retirees, adding just over £14 per week to the value of the flat-rate state pension.”

Those in receipt of the flat-rate state pension currently receive £179.60 per week, while the basic-rate state pension is worth £137.60.

Steven Cameron, pensions director at Aegon, said the chancellor had two choices to deal with this issue.

The first was to smooth out the sharp peaks in earnings growth and price inflation by basing triple lock increases on trends over two or more years.

The second was to use an adjusted figure with distortions from furlough and loss of lower paid jobs stripped out. 

“Otherwise, state pensioners could end up with windfall wins resulting from the chaos the pandemic has brought to workers”, Cameron said.

Rebecca O’Connor, head of pensions and savings at Interactive Investor, said making these tweaks to the triple lock would be more favourable than scrapping it altogether.