Could dramatic OBR earnings forecast revisions mean the state pension triple-lock is spared?

•    Office for Budget Responsibility (OBR) economic forecast published today confirms UK borrowing likely to hit the highest level in peacetime history as a result of COVID-19
•    Despite this, the Government’s labour market interventions – in particular the Coronavirus Job Retention Scheme – are now expected to flatten volatility in average earnings growth over the next two years
•    In the OBR’s ‘central scenario’, the ‘triple-lock’ will boost the value of the state pension by 2.5% in 2021 and then a further 5% in 2022
•    New forecasts could give Chancellor Rishi Sunak leeway to spare the policy in his Autumn Budget
•    By 2024/25 the triple-lock is expected to cost £6 billion more than a straight CPI inflation lock and £3.2 billion more than a lock to average earnings

Source: OBR Financial Stability Report and AJ Bell analysis; state pension increases rounded up to nearest 5p each year

Tom Selby, senior analyst at AJ Bell, comments: 

“Previous OBR projections suggested the UK’s economic lockdown could see average earnings crash by 7.3% in 2020 before rebounding 18.3% in 2021. 

“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.

“However, 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. 

“Even in this context the triple-lock remains expensive, particularly over the medium-term. Based on current OBR projections, by 2024/25 the triple-lock will cost the Exchequer £6 billion compared to a straight CPI inflation link and £3.2 billion versus a lock to average earnings. 

Ripe for review

“While clearly maintaining the triple-lock would be good news for pensioners – and potentially provide a bumper income increase in 2022 - it remains an odd policy which should be reviewed. 

“Randomly ratcheting up the real value of the state pension without ever saying what the target value is makes little sense. 

“Furthermore, recent events have shown that in extreme economic circumstances the Treasury faces the risk of being left footing a massive state pension bill.”