Earnings growth brings state pension triple lock into question

Earnings growth of 5.6 per cent over the three months ended April 2021 has cast doubt over the affordability of the triple lock on the state pension, according to Aegon and Hargreaves Lansdown.

Aegon pensions director, Steven Cameron, called the earnings growth figures an “early warning” to the government about the triple lock, stating that they will soon have to decide whether to give pensioners a particularly large increase or break a Conservative Party manifesto promise.

The triple lock formula, which the party had committed to maintaining, grants state pensioners an increase of the highest out of average earnings in the year to July, price inflation or 2.5 per cent, and the government faced calls last year to scrap or change the calculation method amid concerns that a post pandemic recovery could lead to a leap in the cost of providing the benefit.

Hargreaves Lansdown personal finance analyst, Sarah Coles, added: “At a time when the government is watching every penny, a double-digit rise in the state pension could call the triple lock itself into question.

“We’re likely to see some eye watering average pay rises in the coming months. We’re now comparing wages to the height of the crisis in 2020, when pay fell back for a number of months. As we go through this period, annual wage inflation is going to rise significantly.”

The situation could be seen as particularly unfair to younger generations as the impact of job losses among lower paid workers accounted for 1.5 per cent of average pay growth.

Aegon pensions director, Steven Cameron, said: “This raises real intergenerational fairness issues as it’s those of working age who pay for state pensions through today’s National Insurance contributions. One solution might be to average out the earnings increase figures over a 3-year period.”

Exploring the current options, Coles explained: “The government has the option of taking double-digit pension rises on the chin, making temporary changes to the formula to ease the pension rise next year, or tweaking the triple lock itself. The triple lock is the bedrock of people’s retirements, so any questions over its future are bound to raise the alarm.

“However, it’s also politically difficult for the government to touch it, so it will be wary of making major changes. One option would be to tweak the formula to account for smoothing of earnings. This allows the government to maintain the triple lock, whilst simultaneously reducing its potency and any unanticipated consequences as a result.”

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