State pension rise to cost £2 billion, says Towers Watson

Labour’s decision to bring forward a rise in the basic state pension will cost £2 billion a year, according to Towers Watson.

In 2007 a cross-party decision was made to bring in an earnings-linked basic state pension by 2015. Actuarial consultancy Towers Watson believes the government’s decision to bring the rise forward to 2012, confirmed in the Labour party manifesto published yesterday, will cost £2 billion a year by the end of the next parliament.

John Ball (pictured), head of defined benefit pension consulting at Towers Watson, said: ‘The main cost comes from linking the basic state pension and pension credit to earnings at all - it was always slightly absurd to say that this long-term commitment might not be affordable in 2012 but would definitely be affordable by 2015.’

In 2006 the government indicated that it would restore the earnings link by 2012 subject to affordability.

‘The public finances are in much worse shape than they were when the government said it would have to wait and see if restoring the earnings link in 2012 was affordable,’ added Ball.

Labour’s manifesto also sets out a timetable of planned increases in the state pension age, which will rise to 68 by 2046.

The Liberal Democrats scrapped their own plans to link the basic state pension to earnings in January.

Shadow chancellor Vince Cable said his party had put many ‘popular’ spending commitments on hold, including the rise in the state pension because they had become ‘unaffordable.’

The Liberal Democrats are due to release their own manifesto on tomorrow.