Think tank says pensions could rise by 7.6% due to Covid

The Resolution Foundation says this increase would be unfair because it would come as working families face the biggest struggles as they try to recover financially from the Covid-19 crisis

A think tank has described a policy that could mean state pensions could cost £3bn more a year due to the coronavirus pandemic as "a mess".

The Resolution Foundation says the triple lock, which guarantees pensions rise each year by whichever is the highest of inflation, earnings or 2.5%, should be replaced with a fairer policy.

The triple lock system would mean a big increase in the state pension in April 2021 and an even heftier hike in 2022.

It would be three times higher than predicted increases in prices or wages.

The Resolution Foundation says this increase would be unfair because it would come as working families face the biggest struggles as they try to recover financially from the Covid-19 crisis.

The Government has so far insisted it plans to keep the triple lock but is planning some as-yet-unannounced adjustments.

The triple lock means the state pension increases each April in line with wage growth, price rises or by 2.5%, whichever of the three is highest.

But the impact of coronavirus has created an imbalance.

It could see the state pension rise three times as fast as prices or earnings - due to the sharp dip in wages caused by the coronavirus outbreak in 2020, followed by an expected spike in take-home pay next year.

The Bank of England is forecasting an unprecedented 2% fall in nominal wages in the current calendar year, followed by a 4 per cent increase next year as millions of staff come off furlough and economic activity has been reignited.

Triple lock rules dictate that such a pay outlook would prompt a 2.5% rise in the state pension next year, with inflation forecast to be well below the guaranteed rate rise, and a 5 per cent increase the year after, giving a two-year increase of 7.6%.

That hike would be triple that of price rises, set to be 2.5%, while considerably more than the predicted 1.5 per cent increase in earnings in the same time period, according to analysis by the Resolution Foundation.

It would mean the state pension would cost £3 billion more in 2022 than if it had kept pace with earnings, and £2.1 billion more than if it had kept pace with inflation.

Laura Gardiner, from the Resolution Foundation, said the increase was "hard to justify" when it would be working-age families "feeling the greatest pinch" in the aftermath of the Covid-19 crisis.

She pointed to benefit cuts in the pipeline that would impact working-age families, including a reversal of this year's £20 per week boost to the basic rate of Universal Credit by next April.

In its report, Locked In, the think tank recommends that ministers scrap the triple lock pension, labelling it a "mess".

But Prime Minister Boris Johnson would have to break a manifesto pledge if he were to act on the report's recommendation, having vowed to keep it in place during his winning campaign last year.

Research director Ms Gardiner said: The triple lock was announced a decade ago as a long-overdue move to restore the link between the state pension and earnings. But while that aim may be laudable, the policy itself is a mess and needs to be replaced.

As a result of the volatile earnings growth that the lockdown has driven, the triple lock will see the state pension increase by 7.6 per cent between 2020 and 2022. That is at least three times the expected increase in prices or indeed wage rises that workers are likely to see, she said.

Such a large increase is particularly hard to justify when it will be working-age families feeling the greatest pinch from Britain's jobs crisis. The Government should scrap the triple lock and move to a much clearer policy of setting a clear objective for the value of the state pension, and then holding it there via a smoothed earnings link, she said.

Work and Pensions Secretary Therese Coffey has admitted the Government will be making technical adjustments to pensions rules.

But she has so far not given any suggestion that the triple lock would be scrapped.