Pressure is growing on the pensions triple lock as average earnings have jumped 7.3 per cent in the latest quarter.
According to data from the Office for National Statistics (ONS), growth in average total pay (including bonuses) was 7.3 per cent and regular pay (excluding bonuses) was 6.6 per cent in the three months to May 2021.
In May alone, total pay was up 8.6 per cent and regular pay was up 7.3 per cent on last year.
Wage growth was negative last year, but earnings have bounce-backed sharply this year with the unwinding of the furlough scheme and the economic re-opening.
But earnings figures could increase even further over the coming months before the final reading is taken for the triple lock in September.
The Office for Budget Responsibility has forecast that earnings growth could rise to 8 per cent in the next two months.
Under current triple lock rules the state pension is increased by the highest of earnings growth, price inflation or 2.5 per cent a year.
If earnings increase by 8 per cent, AJ Bell pointed out, the flat-rate state pension could increase by £746.20 to £10,085.40 next year (£193.95 per week).
According to analysis from Jon Greer, head of retirement policy at Quilter, assuming earnings growth remains at 7.3 per cent, and CPI inflation stays below this figure, the triple lock will uprate state pensions to the following:
| 2021/22 | 2022/23 | ||
Basic state pension | £137.60 | £147.65 | ||
New state pension | £179.60 | £192.70 |
*Assuming uprating of 7.3 per cent, rounded to the nearest 5p based on full entitlement.
By keeping the triple lock in place, the 7.3 per cent uprating will cost the government an additional £6.7bn in 2022/23.
This is £4.4bn more than if the state pension increased by CPI inflation or 2.5 per cent only, Greer said.
This cost is hard to justify when the government is looking to pay off its Covid bills, he added.
Instead, Greer suggested the government should temporarily tweak the triple lock by using a three-year rolling average figure for wage growth.
According to Greer, this would uprate the state pension by 3.4 per cent in 2022/23 to give pensioners the following weekly income:
| 2021/22 | 2022/23 | ||
Basic state pension | £137.60 | £142.30 | ||
New state pension | £179.60 | £185.70 |
*Assuming uprating of 3.4 per cent, rounded to the nearest 5p based on full entitlement.
This methodology would provide a short-term solution to the wage volatility experienced this year, and save the government £3.5bn next year compared to maintaining the triple lock in its current form.
Tom Selby, senior analyst at AJ Bell, agreed that the chancellor would have to consider different options, including the above.
He said another option would be to ditch the earnings element of the triple-lock altogether.
Selby said: “The amount of money this would save would depend on what happens to inflation during that period.
“However, the political price of breaking a manifesto commitment that affects older voters may be too much to bear.”
amy.austin@ft.com
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