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Will promised state pension increases materialise?

According to the 'triple guarantee' the state pension is set to rise in line with soaring inflation. But will the government honour its promises?

 
Will promised state pension increases materialise?

According to the 'triple guarantee' the state pension is set to rise in line with soaring inflation. But will the government honour its promises?

Income boost ahead?

Amid all the outcry about inflation hitting 5.6% – or 5.2% if you believe the Consumer Price Index (CPI) shows the real rate – the only good news is the increase it will mean for state pensions and benefits. These benefits are uprated in line with CPI inflation every September, so pensioners should see a useful boost to their incomes of just over £5 a week.

But will they? Uprating pensions and benefits in line with inflation will cost an estimated £1.8 billion, according to the Institute for Fiscal Studies, which the government can ill afford. And with the Autumn Statement due on 29 November, there is concern that the government will cut or freeze rises in benefits. 

‘The government has no discretion over the uprating of pensions and it would require primary legislation to change that. It is obliged to uprate pensions in line with the triple guarantee,’ a spokeswoman for the Department for Work and Pensions says.

Ways out of commitments

Until April 2011, the basic state pension was uprated in line with increases in the higher retail prices index. From April 2011 the basic state pension was protected by the government’s 'triple guarantee'. This means it will be increased every year by whichever is highest out of growth in average earnings, increase in prices as measured by CPI, or 2.5%. With CPI inflation running well above 2.5% and wage increases, those in retirement should be in line for a useful 5.2% rise in their pension income – unless the government can find some way to wriggle out of the commitment.

But this 'triple guarantee' does not apply to additions to the state pension such as graduated contributions, Serps and S2P-earning-related pension top-ups. Furthermore, the guarantee does not extend to state benefits such as unemployment, housing and tax credits or public sector pensions.

Even more alarming, the government has refused to confirm that it will uprate pensions and benefits in line with the September inflation figure. This could mean that they are reading the small print to see whether they can link state pension increases to a different month’s inflation, or that they are intending to stick to the guarantee for the state pension, but not increase other public sector pensions and benefits in line with September’s CPI figure. 

Revising the figures

A spokesman for number 10 has said that upratings are a matter for chancellor, George Osborne, and will be announced at the Autumn Statement in November. All the chancellor’s figures are based on inflation at a much lower level than CPI at 5.2%, and this shock increase will put the cat among the pigeons. Figures from the Office for Budget Responsibility took into account pensions and benefit uprating at 4.3% when they were compiled during the March Budget.

The September inflation figure of 5.2% comes as a nasty shock and throws all the chancellor’s calculations and targets for reducing the fiscal deficit into chaos.

He will be accused by the money markets of fiscal profligacy if he increases benefits and pensions in line with inflation. But he will face a barrage of criticism from consumer groups representing pensioners, public servants and those in receipt of benefits if he doesn’t. Meanwhile, those in work who have suffered a freeze on child benefit and reductions in working tax credits will feel aggrieved if they are penalised while those receiving unemployment benefit enjoy a CPI-linked rise.

The economic case for rises

There is a case for increasing benefits in line with the CPI, which the Lib Dems may well push, even although it will be costly. By definition, those on benefits are low-income families. Any extra money in their pockets will undoubtedly be spent immediately – hopefully giving a boost to the economy. The effect will be the same as a tax-cut for these families.

Consumer groups argue that the chancellor has already cut benefits by switching the link from RPI to the lower CPI, a change that took place last month. Had the change not been made, benefits would have to be uprated by RPI at 5.6% rather than CPI at 5.2%. Even at 5.2%, this is still 0.9% more than budgeted for back in March.
 
Looking on the bright side, if the chancellor does find he is tied by legislation to increase the basic state pension by the increase in the CPI, the single person’s pension would rise by £276 a year, or £5.31 a week, to £107.46 a week from April of next year. The joint state pension would increase by £8.49 to £171.84, up £441 a year.  

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14 comments so far. Why not have your say?

xxxxx

Oct 19, 2011 at 19:17

Lorna Burke's article is already out of date. No doubt some kite flying going on by the Treasury to test reactions.

3.45 pm Treasury minister David Gauke was just asked about the potential 'black hole' caused by any uprating.

"Well, obviously there will be an Autumn Statement when the Chancellor will set out an update on the public finances and this will be one factor amongst many.."

Martha Kearney interjected: "You seem to be leaving open room for maneouvre there that you may not peg the benefit rises to September.."

Gauke replied: "No, I'm not. I'm saying there are a number of factors that will determine the public finances, one of which is the increase that we will see in pensions, for example. We are commited to that increase in the minimum in line with CPI..."

But while he was firm on pensions, note that the minister signally left out an explicit reference to an increase in benefits.

FURTHER UPDATE: TUC General Secretary Brendan Barber clearly reads this blog. Here's his quote to PoliticsHome:

“Today’s hint that the Chancellor won’t honour the commitment to uprate benefits in line with this month’s inflation figures is very alarming. The cost of living has rocketed for those who depend on benefits more than any official measure captures. Not only does the Chancellor want to use CPI, the generally lower inflation measure that excludes important items like housing, it now seems that he may not even keep that promise.”

Treasury are being wonderfully Sphinx-like, either to keep their options open or out of reluctance to confirm anything ahead of Autumn Statement.

Here's what one Treasury source just told me: "Standard policy assumption is to uprate in line with Sept inflation". When asked if that means Chancellor will definitely uprate benefits in line with Sept...radio silence.

UPDATE: Treasury sources tell me not to read too much into all this: "We will follow standard procedures."

That may be enough to kill off the speculation now.

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Michael Peters Fenwicks

Oct 19, 2011 at 20:09

In my opinion a pension is a privilege while also not being a human right.

The alternative is simple - save for your own retirement instead of these ponzi government schemes.

In many countries it is the norm to save for your retirement from the time you start work.

I mean in your 20s..................why not in Britain?

What happened to individual responsibility ?????

I don't believe they will be anything left by the time I retire so better to make alternatives.

Diversify investments in other words internationalized - best strategy when it comes to investment!

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ynys

Oct 19, 2011 at 20:17

A bit of pointless scaremongering methinks

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Allen Williams

Oct 19, 2011 at 21:11

I don't want to labour this point, but those of us who rely on index linked benefits and public sector pensions have had to bear cost of living increases at a rate far above those measured by the CPI since (as you say) nearly all income is necessarily spent. An extremely high proportion of this is spent on items which have increased far more than the CPI, particularly rent, fuel bills, bus and train fares and basic foodstuffs. Also, bear in mind that the CPI increases are reflected in income increases only after a considerable time-lag (the increase in the past 12 months which we have all had to bear is reflected in my pension increase only next April). We are also tax payers (liable to Income Tax on our earnings, Council Tac and VAT (the last of which has in itself increased by more than 5% in the past year).

The Government cannot surely, escape its obligation to maintain increases in our income even at the present inadequate rate. OK, we all have to bear the brunt of the recession, but not, I would have thought, more so for us who are least able to sustain it.

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leobramble

Oct 19, 2011 at 21:28

Re Fenwick's remarks....what do you mean a pension is a priviledge? Excuse me, but I've been contributing to this all my working life! If not, then the government have no right taking money from me to pay for it. I also contributed to private pension provision but thanks to the incompetence and greed of the 'financial' boys, this has turned to dust and I will get barely 20% of what was promised 30 hears ago. They should all be strung up on the gallows down Horseguard Parade to be jeered at but is unlikely while they bankroll the Coalition. I was looking forward to a relatively comfortable retirement but instead I'll be turning the heating down and probably off altogether. Wonderful Britain and the Tory boys couldn't care less, most being millionaires and therefore couldn't care less about the common herd and have no empathy whatsoever. They don't get it now but I'm hoping they soon will. See what's happening in Athens today? That will be nothing as to what will very probably happen here.

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Paul Harris

Oct 19, 2011 at 21:47

I wonder how old Mr Fenwicks is. Having just reached state pension age after being taxed for 40 years how dare he say it is a "privilege". My private pension schemes have also NOT reached the heady heights suggested they might by IFAs, one of them being the Arch cru fund.

No doubt Mr Fenwicks will not take his state pension when it becomes due.

leobramble should remember what the last government did in screwing up the economy before he only blames the Tories and also the changes introduced by Brown regarding the regulatory authorities and the raid on private pension funds.

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Allen Williams

Oct 19, 2011 at 22:02

I agree with Leo: your pension provision is part of the deal when you take employment. Perhaps the main consideration when I took employment in the public sector was the pension deal. The remuneration was perhaps less than in the private sector, but the pension was what swung it. Messing about with your pension in the subsequent years really is unfair, and any reduction in that provision is tantamount to reducing your salary. Not on the cards!

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snoekie

Oct 19, 2011 at 23:55

I bet 1 penny to the pound that the public sector pensions (judges, former MPs Speakers, ex PMs, retired ministers, civil services, former etc et al) will receive their RPI increases, but not the rest of the plebs............

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JohnnyOilShareHolder

Oct 20, 2011 at 00:58

I think it would be political suicide to hit the pensions any more than the already-controversial change from RPI to CPI, even though a very good proportion of our current economic woes can be clearly blamed on profligate policies by the labour govt. The Labour Govt sold of our gold reserves, at about 25% of current value, killed many private pension schemes with their stealth tax on corporations, and generally mismanaged the economy and allowed us to get heavily in debt. It is now essential savings by the more prudent coalition govt that should hopefully rescue us eventually. No No No way, however, could they accept the political barrage and probably Euro court rulings too, which would arise from the clear breaches of contract if they cut state pensions (which we've all paid for all our lives) any more beyong the CPI.

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ynys

Oct 20, 2011 at 01:28

But these nasty anomalies are happening because inflation is running riot - the real wrong!

Cheat by letting inflation run unabated (ie no rises in interest rates) and all sorts of troubles will build up as a consequence

Printing money, keeping interest rates artificially low is cheating and only a fool will fail to see the ultimate damage caused.

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Anonymous 1 needed this 'off the record'

Oct 20, 2011 at 07:53

This government will fall if it doesn't honour its commitment to increase pensions in line with inflation. We, the baby-boomer generation, are already being punished enough because of low interest rates and the dangerous policy of printing money. Cheating? I agree. As for Michael Peters Fenwicks (sic) he is clearly the kind of I-know-everything spiv who got us in this mess in the first place.

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TRUTHMAN

Oct 20, 2011 at 10:49

i wish the author of this article would make her mind up,in one paragraph it says the rise will not be applied to unemployment benifit and further down in the article she says people will be aggrieved if the unemployed get it ,but people working will not!

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alan thorburn

Oct 20, 2011 at 14:12

How does this woman keep her job? Week after week drivel after drivel!

I say Lorna Burke should join the unemployed!

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snoekie

Oct 22, 2011 at 16:07

If there is a black hole for the pensions, I have a very simple solution.

Just as they do not honour this legislation, there is nothing stopping them from abandoning the rash promise made in the run up to the election, about foreign aid, prblem solved.

Moreover, I am on the basic rate of taxation but am (probably like many contributors to these articles) paying about £1000 more in tax than is warranted by my income, because I am unable to reclaim from dividend income, already taxed, the balance pensioner's allowance, £9,940, over the state pension. The only other income would be the few peanuts from reserves, rainy day fund and that on stand by for bargains in the equity market.

Specifically I cannot set off the 'surplus' allowance over the state pension against dividend income. That has got to be wrong.

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