New earnings figures highlight need for triple lock solutions

The pensions industry has highlighted new earnings figures from the Office for National Statistics (ONS) as putting further pressure on the government to make a decision about the triple lock on the state pension.

The newly released earnings figures showed average earnings climbed by 7.3 per cent in the three months ended May and had risen by 8.6 per cent between May 2020 and May 2021, although a significant portion of this growth has been attributed to workers coming out of furlough and a disproportionate number of people losing low-paid jobs.

The triple lock on the state pension ensures that the benefit increases by whichever is highest out of average earnings, inflation or 2.5 per cent.

LCP partner, Steve Webb, argued: “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.”

In terms of the adjustments that Sunak could employ in order to keep the state pension down, Aegon pensions director, Steven Cameron, pointed out that ONS had sought to provide earnings figures without distortion from the influence of pandemic factors, which put earnings growth at between 3.2 per cent and 4.4 per cent.

He continued: “Using these figures could be an option for the chancellor to retain the triple lock principles, albeit with adjustment. Another consideration would be to smooth out the sharp peaks and troughs we’re seeing in earnings growth and base triple lock increases on experiences over two or more years.

“The ONS report points out that looking over a two-year period, the growth in average earnings is actually less at 7.1 per cent than the rise over one year of 8.6 per cent. If an average over two years were taken, the earnings component would be around 3.5 per cent.”

AJ Bell senior analyst, Tom Selby, noted that the Office for Budget Responsibility has estimated that “every 1 percentage point added to the state pension via the triple lock costs the Treasury just shy of £1bn” and suggested that “one option would be to ditch the earnings element of the triple-lock altogether, either for this year only or perhaps the rest of this Parliament”.

Summing up the issue, Selby stated: “Chancellor Rishi Sunak faces being caught between the Devil and the deep blue sea on the state pension triple-lock. While the policy could add billions of pounds to public spending at a time of severe fiscal pressure for the country, unpicking it would break a manifesto commitment.”

Cameron concluded: “The chancellor has indicated that any decisions to put the UK’s finances back on a sounder footing post-pandemic will need to weigh up the interests of different generations. The state pension is paid for by National Insurance contributions of today’s workers, so the government will face a difficult balancing act.

“There will be questions around intergenerational fairness if state pensioners receive a 8 per cent or higher increase, paid for by today’s workers, which is far above the pay rises those workers will typically have received.”

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