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New calculation method for pension increases

08 November 2012

The Minister for Social Security is proposing a new way to calculate the annual increase in old-age pensions. Senator Francis Le Gresley wants to continue to peg the medium to long term growth in pensions to average earnings, while ensuring that increases keep pace with changes in the cost of living for pensioners.

At the moment pensions go up each year in line with the growth in average earnings. This has resulted in significant growth in the value of pensions relative to the increase in the cost of living and has seen the purchasing power of pensioners grow accordingly. 

It has also provided a direct link between increases in pensions and the average rise in the earnings of the working population, who pay for current pensions through their contributions to the Social Security Fund.


However, in four of the last five years, prices have risen faster than wages, and both workers and pensioners have seen a fall in the real value of their incomes.

Following the recent pension increase of 1.5% Senator Francis le Gresley made a commitment to review the method of calculating the annual increase. After discussions with fellow ministers, his department will now be drawing up detailed plans to protect the value of the old-age pension.

Senator Le Gresley explained “ I am very aware of the difficulties that many pensioners have faced during the protracted economic downturn.  I hope pensioners will be reassured by these proposals which guarantee that future pension increases will at least match the rise in prices during the year, while still enjoying increases in line with the earnings index in the long term.

“At the same time, I am responsible for maintaining the long-term sustainability of the Social Security Fund, which is under threat from the impact of our ageing population. In the future, contributions from workers will need to fund the pensions of  far more pensioners. The 'triple lock' mechanism rejected by the States earlier this year was very expensive as it would have led to pension costs increasing year on year. In contrast, my new proposal limits the long term increase in costs.  

“The scheme gives a firm guarantee to pensioners that their pension will always match the annual increase in prices. The Social Security Fund will bear the extra cost in those years. In other years, when the economy is doing well and wages are rising faster than prices, pensioners will receive an increase that is always above the increase in prices, and will match  the long term rise in earnings. By smoothing out the increases in pension rates, we can ensure that the long-term cost to the Fund is sustainable.”


The Minister went on to say “We have more work to do on the details of the scheme, but I expect to lodge a proposition early next year. If the States agree, this would lead to an immediate rise in the rate of the old-age pension, probably in April 2013. 

"The increase will bring the value of the pension in line with the increase in RPI (pensioner) from June 2012, which will be an additional 1.4% on top of the 1.5% that has already been provided.”

Future annual increases will be decided as follows:

  • If prices have risen faster than wages, the pension will be increased in line with prices (RPI(pensioner))
  • If wages have risen faster than prices, the pension will be increased at least by the midpoint between the two rates, up to a maximum of the growth in wages
  • The exact value of  the increase will depend on the long-term position of the pension index against the earnings index

By matching the long-term increase in pensions with the  long-term increase in earnings, the additional cost to the Social Security Fund of providing this protection will be kept to a minimum.

Further details of the scheme will be published in early 2013.

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