Average weekly earnings (excluding bonuses) rose 7.4% in the three months to June year on year, according to the latest data from the ONS. This compares to 6.6% published last month.
Without a change in the law, the Chancellor is obliged to increase the state pension by the growth in average earnings, whilst the ‘triple lock’ policy restated in the Conservative manifesto of 2019 also requires a link to earnings growth where this is higher than the growth in prices or a floor of 2.5%.
The final ‘triple lock’ calculation will be based on the earnings figures published in September (for the three months to July 2021), whilst the inflation figure used in the triple lock calculation is the September CPI (published in October).
According to actuarial consultancy LCP total spending on the state pension is currently around £100bn per year, and of this around £85bn is covered by the ‘triple lock’ policy. This means that if the Chancellor were to water down the ‘triple lock’ commitment, for example by using a lower measure of earnings growth, he would save around £850m on state pension spending for each 1% shaved off the increase.
Steve Webb, partner at LCP said: “Average earnings are well above their level a year ago, partly because some furloughed workers are back on full pay and also because some lower paid jobs have been lost altogether.
“These figures pile pressure on the Chancellor as he will want to stick to his triple lock policy but not pay a huge increase to pensioners, especially at a time when many working age benefits are about to be cut by £20 per week.
“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”.
According to research from Canada Life, almost half of UK adults (46%) believe the state pension triple lock should stay as it is. The provider surveyed 2,000 UK adults (conducted by Opinium) between 16 and 19 July.
Over 50’s were much more likely to want to keep the triple lock promise with almost 6 in 10 (59%) supportive of maintaining it compared to around a third (34%) of those under 50. Women were more likely to see both sides of the argument, with more than a quarter (27%) saying they do not know, compared to less than one in ten (9%) men.
Only 16% of respondents supported a move to a less generous ‘double lock’, which would lead to an increase in line with inflation or 2.5%. Even fewer people (14%) supported the idea of finding a compromise to use a lower earnings figure with the furlough impact stripped out.
Earnings growth including bonuses hit 8.8% in April to June, according to the Labour Market statistics from the ONS.
Laith Khalaf, head of investment analysis at investment platform AJ Bell, said this could be an indication there is a “glitch in the ONS matrix”.
He said: “When earnings are rising at almost 9% 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.
“Statistical quirk or not, the high rate of headline earnings growth does hem the government into a tight little corner on the State Pension triple lock. The conservative manifesto commits to maintaining the triple lock, but an 8% 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.”
Ian Browne, pensions expert at Quilter, said the triple lock is “ticking time bomb” for the Chancellor and “one of the most contentious spending decisions of a generation” and that he is running out of time to make a decision.
He said: “Does he risk jeopardising the grey vote by tweaking or scrapping the lock to save a pretty penny, or does he hold fast on the lock and give pensioners a seismic boost to their income despite the controversial cost? Sunak will have to decide whether to cut the red wire or the blue wire, but so far he has just stalled.
“This morning’s data reveals earnings growth remains at unusually elevated levels thanks to the unwinding of the furlough scheme and the economic re-opening with earnings growth boosted by 8.8% in the three months to June. This elevated earnings growth will have a big impact on the triple lock.
He added that the fact that earnings growth has increased “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”.
The Chancellor could temporarily tweak the triple lock this year by moving to a three-year average figure for wage growth in order to smooth the temporary spike caused by the end of the furlough scheme. This is temporary stop-gap that has previously been suggested as an option by several market commentators, including LCP and Quilter.
Mr Browne said that using this amended earnings growth figure would increase the state pension by 3.9% next year, and would save the government £4.5bn while maintaining a degree of intergenerational fairness.
He said: “A change from the current trajectory is the only way to truly ensure fairness between taxpayers and pensioners. But it is important to remember that what’s up for debate is not whether state pension incomes should go up or down, but by how much they should go up. With inflation on the rise and in the current economic climate, not too many would suggest pensioner income should fall.”
According to retirement specialist Just, a triple lock increase of 8% would still leave State Pension £730 a year short of the minimum acceptable retirement income. The Joseph Rowntree Foundation calculates a single pensioner’s Minimum Income Standard to be £10,816 but an 8% increase in the State Pension would take it to £10,087 a year.
The firm added that women are the most likely to be impacted should the Chancellor abandon the pension triple lock pledge.
Twice as many women as men aged over 65 are either single, widowed or divorced in England - 2.77m women compared to 1.41m men. OECD figures estimate that women in the UK are likely, on average, to be receiving between 34% and 43% less in retirement than men.
Stephen Lowe, group communications director at Just Group, said: “Given women aged 65 and over are more likely to be single and have a lower income than men, any reduction in the triple lock seems set to hit women disproportionately
“There is already a substantial retirement income gender gap in the UK, removing some of the protections around the State Pension sends a message from government that it is happy to risk damaging financial outcomes for women in later-life even further.”
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