The state pension triple-lock increases pensions by the highest out of earnings, inflation and 2.5%
Average earnings are up by 7.4% excluding bonuses, while this figure rises to 8.8% with bonuses included, according to data released by the ONS on Tuesday.
The soaring wage growth is bringing eyes on to pensions and what the ramifications are for the state pension triple lock.
There has been calls to scrap the state pension triple-lock, which increases pensions by the highest out of earnings, inflation and 2.5%.
This would mean that pensioners would be set to receive a substantial uplift in their income.
“This poses a problem because the Conservative Party committed to maintaining the triple-lock in their manifesto. An 8% rise will put huge pressure on the public finances at a time when the Treasury is already staring down a fiscal black hole,” said Tom Selby, head of retirement policy at AJ Bell.
However, pension legislation allows the government to estimate the growth in earnings in whichever was it deems appropriate.
“Historically it’s the May to July earnings growth figure that’s been used for the triple-lock calculation, and expectations are this could be around 8% when published next month. However, pensions legislation allows the Government to estimate the rise in earnings as they see fit, and doesn’t tie them to the headline rate published by the ONS,” Selby added.
This would allow the Conservatives to keep their manifesto promise to maintain the triple-lock, while curbing the cost of the state pension.
“Coincidentally, the ONS has now started publishing a figure which tracks the growth in underlying earnings in the economy, stripping out the distortive effects of the pandemic. The latest data released shows that headline earnings grew at 7.4% year on year (not including bonuses), but underlying earnings grew at somewhere between 3.5% to 4.9%, a considerably lower rate.”
“By choosing the lower of these figures, the Government could legitimately cut the state pension bill by around £3.5 billion compared to using the headline rate (the OBR estimates a 1 percentage point rise in the rate creates £0.9 billion more of pensions spending),” says Selby.
This approach could allow the government to get the best of both worlds when it comes to the triple-lock. It allows them to keep their manifesto without putting additional strain on public finances.
Selby believes that while the Conservatives have committed to maintaining the triple-lock, its longer-term survival remains in doubt.
