When setting the rate of the state pension there are several competing approaches.
One argument is that annual increases should simply reflect what has happened to prices in the shops over the previous year. If the pension keeps pace with prices, then the living standard of the retired population will be maintained.
A second argument is that if people in work are enjoying pay increases then pensioners should share in this prosperity. Given that pensions exist to support people when they are no longer earning, a link between the level of pensions and the level of earnings makes sense.
But sometimes neither earnings nor prices rise very much and simply linking the pension to either measure can result in an increase measured in pennies rather than pounds. As Gordon Brown famously discovered, paying an increase of 75p just before a general election was not well received and he was forced to pay a £5 increase the year after to try to undo the political damage.
The coalition introduced the triple lock
The combination of these three arguments was what gave rise to the triple lock, introduced by the coalition government after the 2010 general election. Under this policy, the basic state pension (and now new state pension) is increased each year in line with the highest of the growth in prices, earnings or a floor of 2.5 per cent. Interestingly, in the first nine years of operation of the policy each of these three elements was used three times.
The dilemma faced by the current government was what to do when the earnings data goes haywire. The triple lock was obviously designed for more normal times, and no one foresaw the gyrations in earnings levels that we have seen as the economy has moved into and out of a global pandemic.
Average weekly earnings rose by 8.8 per cent in the latest three-month period (April to June) against the same quarter last year, according to the Office for National Statistics. But the ONS says this figure is not a fair reflection of the pay rises that people in work are receiving. This is for two reasons:
- The furlough scheme meant some people were on reduced wages for a limited period. Now that they are back on full wages it looks as though they have had a big pay rise when in reality their pay is probably only restored to where it was a couple of years ago.
Given that pensions were not cut when wages fell, it is hard to see why they should surge now wages are recovering.
- The mix of people in the workforce has changed. In terms of job losses, the pandemic has disproportionately affected those on lower wages. As these workers drop out of the figures altogether, the average wage goes up.
But this is simply because there are fewer lower paid people and not because those still in work have had big pay increases.
For both of these reasons, the 8.8 per cent figure is an artificially high measure of earnings growth and would have been very hard to justify as the basis for the April 2022 pension rise.
The government had two main options for April 2022. One was to look for an adjusted earnings figure, perhaps looking at underlying earnings growth, to strip out the pandemic effect. The other was simply to ignore the distorted earnings figure for one year and to pay the higher of prices or 2.5 per cent.