Smoothing the triple lock formula to take a two-year average of each element could save the policy while avoiding distorted state pension rises, according to Aegon.
The pensions giant suggested there may need to be “temporary adjustments” to the triple lock pledge to ensure “artificial distortions” from the furlough scheme and the economic repercussions of the coronavirus crisis are smoothed out.
Under current rules, the state pension is increased by the highest of earnings growth, price inflation or 2.5 per cent a year. But the Office for Budget Responsibility has predicted that average earnings will fall by 7 per cent this year amid the crisis and in light of the fact a hefty chunk of the workforce has been receiving 80 per cent pay from the furlough scheme.
Next year, as the country is expected to recover and the furlough scheme ends, the OBR said earnings could see up to an 18 per cent increase. If average earnings growth increased by this much, the state pension would have to follow.
The conundrum has caused industry experts to argue the triple lock in its current form will “have to go” next year to avoid raising the state pension by a fifth, but to scrap the pledge would break one of the key election pledges made by the Conservative party in December 2019.
Steven Cameron, pensions director at Aegon, said: “The state pension triple lock has met its aim of making sure state pensioner incomes have at least kept pace with both inflation increases and earnings growth with a guaranteed underpin of 2.5 per cent each year.
“But the formula was set in a very different pre Covid-19 age when price and earnings growth tended to be relatively stable year on year.
“Blindly following that formula now as we move through and out of the coronavirus crisis with huge distortions to average earnings expected could create bizarre results which were never intended and which would fail any test of intergenerational fairness.”
Mr Cameron said a solution would be to look at the triple lock over two years rather than one, meaning state pensioners would be granted whatever the formula produces next April, but the increase in 2022 would be based on a two-year period.
If earnings do fall and then rise as expected, this would be averaged out.