Triple lock ‘ticking time bomb’ as earnings grow 8.8%

According to data from the Office for National Statistics (ONS) out this morning (August 17), growth in average total pay (including bonuses) was 8.8 per cent and regular pay (excluding bonuses) was 7.4 per cent in the three months to June 2021.

Wage growth was negative last year, but earnings have bounced backed sharply this year with the unwinding of the furlough scheme and the economic re-opening.  

The ONS stated: “Average pay growth rates have been affected upwards by a fall in the number and proportion of lower-paid jobs compared with before the coronavirus pandemic and by the base effects where the latest months are now compared with low base periods when earnings were first affected by the coronavirus pandemic.”

But there is now the question of whether earnings figures will increase further before the final reading is taken for the triple lock adjustment in September. 

Ian Browne, pensions expert at Quilter, said: “The fact that earnings growth has increased from 7.3 per cent in the three months to May to 8.8 per cent in the three months to June suggests the chancellor’s worst fears will become reality and he’ll either have to spend billions extra on the state pension next year and forever after, or make a political challenging decision to tweak the triple lock or scrap it entirely.”

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 growth remains at 8.8 per cent, Quilter pointed out the triple lock will increase the cost of the state pension by £8bn, £5.7bn more than if it increased by 2.5 per cent. 

According to analysis from Browne, weekly pensioner income would increase to the following:

*8.8 per cent, rounded to the nearest 5p based on full entitlement.

This cost is hard to justify when the government is looking to pay off its Covid debts.

Laith Khalaf, head of investment analysis at AJ Bell, said: “When earnings are rising at almost 9 per cent a year, we can safely say either the economy is overheating, or there’s a glitch in the ONS matrix. In today’s case, it’s the latter.

"The sheer magnitude of the spike in earnings suggests it’s a transitory statistical quirk, rather than a sustainable feature of the UK economy that will be with us for the long term.”

But this still puts the chancellor into a difficult situation on the triple lock, Khalaf said.

He added: “The conservative manifesto commits to maintaining the triple lock, but an 8 per cent rise in the state pension would raise questions of intergenerational fairness, as well as fiscal sustainability. That’s particularly the case given the statistical distortions caused in the headline earnings figures by the pandemic. 

“The government normally uses the earnings growth figure published in September to determine the triple lock, and on current trends, the numbers don’t look like they’re heading in a direction that will dig them out of a hole, so some creative thinking may be required.”

Steve Webb, partner at LCP, said: “This is ultimately a political judgment for the government, but the most likely option remains to look for a measure of earnings growth which strips out the effect of the pandemic.  

“This could save the chancellor several billion pounds a year whilst still allowing him to claim he had kept to the ‘spirit’ of the triple lock promise.”

Research from Canada Life, published yesterday (August 16), found there is a large generational divide when it comes to keeping the triple lock in its current form.

Almost half of savers (46 per cent) believe the state pension triple lock should stay as it is, despite earnings surging this year, but over 50s are much more likely to want to keep the triple lock promise with 59 per cent supporting it compared to about a third (34 per cent) of those under 50.

amy.austin@ft.com

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