Without a change in the law, the Chancellor is legally 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).
If the final average earnings figure was in line with today’s headline figure of 6.6%, this would lead to an April 2022 increase in the basic state pension (currently £137.60 per week) of £9.10 (rounded to nearest 5p), and in the new state pension (currently £179.60 per week) of £11.85.
However, the final figure could be higher than today’s headline 6.6%. As well as giving figures for the three months to May 2021, ONS also publish a one month figure, comparing May 2021 with May 2020. This is even higher at 7.3% (to the nearest 0.1%). If this was a pointer to the eventual state pension increase, the Chancellor could be faced with a rise of £10.05 in the basic state pension and of £13.10 in the new state pension.
Around £85 billion of pension spending is covered by the triple lock pledge, so each 1% increase adds around £850m to the state pension bill (ignoring any resulting increase in income tax revenues or savings on means-tested benefits). This means an increase of 6.6% would add around £5.6bn to state pension spending, whilst an increase of 7.3% would add around £6.2bn.
The only comfort for the Chancellor in today’s figures is that average earnings were the same in May 2021 as in April 2021.
The ONS say that the earnings figures are distorted by two factors:
- Average earnings dropped last year, partly due to millions of workers being ‘furloughed’ on reduced wages; as workers go back on full pay this year, this produces a surge in average earnings;
- Job losses have been concentrated amongst lower earners; removing lower earners from the figures boosts the average pay of those who are left, even without any actual pay increases;
If the Chancellor wanted to retain the principle of the ‘triple lock’ he could adjust the earnings figure in one of two ways:
- He could measure earnings growth over the last two years, stripping out the effect of the ‘slump then surge’ of average earnings; this would give an annualised increase of 3.6% per year over the last two years;
- He could ask ONS to calculate an ‘underlying’ earnings growth figure, stripping out the distorting effects of the Pandemic on the economy; ONS say in a blog published this morning that this could be in the range 3.2%-4.4%
In either case he may find that he needs to pass legislation to justify using a different measure of earnings from the method used for the last decade.
Commenting, Steve Webb, partner at consultants LCP said: “The triple lock was designed to give a steady boost to the value of the state pension which remains one of the lowest in the Western world. But it was not designed for a period when average earnings figures are as volatile as at present. The Chancellor may well be tempted to use an ‘adjusted’ average earnings figure for the April 2022 uprating as this might ‘get him off the hook’ this time round. But if he does so he should also re-commit to a strategy of building up the value of the state pension thereafter. This is particularly important to growing numbers of women who have worked in the private sector, who may have very modest workplace pensions and are heavily dependent on the state pension”
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