PPI: Earnings smoothing mechanism would save £15bn on state pensions
Pardon the Interruption
This article is just an example of the content available to mallowstreet members.
On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.
All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.
The Pensions Policy Institute has published a briefing note exploring the potential impact on the government and on pensioners of moving from a triple lock to a different measure of inflation for state pensions.
The note looks at the potential impact of moving from the current triple lock - whereby state pensions increase by the highest of earnings, inflation and 2.5% - to a double lock and compares this to an earnings smoothing mechanism.
Daniela Silcock, head of policy research, said: “It has become increasingly clear to economists that changes in employment, arising from COVID-19 are likely to result in spikes in earnings inflation in 2021, which would mean that a double lock would not save any money on the State Pension bill in that year.”
It is expected that next year, earnings inflation will appear artificially high as it will reflect the jump from reduced levels to standard levels of earnings, as well as any new earnings inflation.
“Using an earnings smoothing mechanism to inflate the State Pension, which, for example, used the average for earnings over 2020 and 2021, (before returning to a triple or double lock in 2022) would mean that a spike in earnings inflation in 2021 would be less likely to result in a dramatic increase in the cost of the State Pension, and could save around £15bn," said Silcock.
The note looks at the potential impact of moving from the current triple lock - whereby state pensions increase by the highest of earnings, inflation and 2.5% - to a double lock and compares this to an earnings smoothing mechanism.
Daniela Silcock, head of policy research, said: “It has become increasingly clear to economists that changes in employment, arising from COVID-19 are likely to result in spikes in earnings inflation in 2021, which would mean that a double lock would not save any money on the State Pension bill in that year.”
It is expected that next year, earnings inflation will appear artificially high as it will reflect the jump from reduced levels to standard levels of earnings, as well as any new earnings inflation.
“Using an earnings smoothing mechanism to inflate the State Pension, which, for example, used the average for earnings over 2020 and 2021, (before returning to a triple or double lock in 2022) would mean that a spike in earnings inflation in 2021 would be less likely to result in a dramatic increase in the cost of the State Pension, and could save around £15bn," said Silcock.
