In the June 2010 Budget the Chancellor announced that the Basic State Pension (BSP) would be increased by the higher of CPI, earnings or 2.5%, known as the “triple lock”. While the TUC welcomed this announcement, we believe the change was over-stated by the government and would result in lower increases in the BSP than would arise from using RPI as the measure of inflation. Today’s announcement confirms that this has been the case.
In today’s Autumn Statement the Chancellor said:
The basic state pension has this year gone up by the largest cash amount in its history. Next year, thanks to our triple lock, I confirm it will rise by 2.5%, higher than either earnings or inflation. That takes the level of the full Basic State Pension to £110.15 a week.
However, average earnings have been rising at historicially low rates and have been below CPI in real terms since October 2009 and since the triple lock was introduced in April 2011. Furthermore, CPI> has been higher than 2.5% since the introduction of the triple lock except for June and September 2012.
The OBR figures project that CPI will be 2.5% or lower from 2013-2018. At the same time, RPI will be much higher. And while average earnings are projected to rise above 2.5% this will not be until 2014 (table 1.1). The OBR report states that the“lower average earnings forecast reduces state pension payments” such that the “lower forecast for average earnings growth reduces state pension costs by £2 billion in 2016-17”. The result of lower earnings projections is that the BSP is lower (table 4.22).
The TUC would have liked RPI to have been used as the measure of inflation in the triple lock given that RPI is invariably higher than CPI. Today’s OBR report puts the long-run difference between RPI and CPI inflation at around 1.3% and forecasts that it will be above 2.5% until 2017 (table 3.5).