Pandemic likely to trigger triple lock's safe mechanism

The triple lock guarantees a rise in state pension in line with the lowest of earnings, inflation or 2.5%

The coronavirus pandemic is likely to trigger the triple lock's fail-safe mechanism, meaning the state pension will rise by 2.5% from next April.

This Wednesday the CPI inflation announcement for September will confirm the triple lock state pension boost retirees can expect from April 2021.

According to pension provider AJ Bell, with Covid-19 likely to keep inflation subdued and average earnings in the three months to July down 1%, it appears highly likely the 2.5% rule underpinning the triple lock will kick in.

The triple lock guarantees the basic state pension will rise in line with the lowest of earnings, inflation or 2.5%.

If the 2.5% is confirmed on Wednesday, this would imply from April next year the ‘old' basic-rate state pension will rise by £3.40 a week from £134.25 to £137.65, and the ‘new' flat-rate state pension will rise by £4.40 a week from £175.20 to £179.60.

Assuming the 2.5% increase goes ahead, the triple lock policy has meant the basic rate state pension will have increased by 41% since the policy's inception in 2011/12, while the flat-rate state pension, introduced in 2016, will have risen by 15%. 

By 2024/25, according to the Office for Budget Responsibility, the triple lock is expected to cost the government £6bn more than a straight CPI inflation lock and £3.2bn more than a lock on average earnings.

AJ Bell senior analyst Tom Selby said: With Covid-19 hammering wages and pushing inflation to almost 0%, the value of the state pension triple-lock has never been clearer.

Despite the UK facing the worst recession on record, chancellor Rishi Sunak has confirmed the triple lock will remain in place "for now".

Selby said with the Treasury's Covid-19 bill now set to rocket past £300bn as the UK enters a second phase of lockdown, "it is inevitable the policy will come under review next year". If the economy bounces back substantially next year and average earnings surge then the costs of the triple-lock risk ballooning.

More broadly, as a policy the triple-lock remains a slightly odd feature of the UK's retirement system. Its existence implies the value of the state pension is too low, but it only increases its value in real terms during periods of low wages and inflation such as we are seeing at the moment, he said.

Selby said, rather than having this random ratcheting mechanism in place, it would make much more sense to agree the value of state pension the government is looking to achieve and then set a course to reach that level.

A report released in April 2020 from think tank The Social Market Foundation (SMF) proposed the triple lock be scraped so the economic burden of the pandemic could be shared fairly between the old and the young.

The SMF estimated replacing the triple lock with a ‘double lock' by removing the 2.5% promise would save £20bn over five years, which could be used to help meet the costs arising from lockdown.