Strong earnings growth raises further questions about affordability of state pension triple lock

Average earnings excluding bonuses increased by 7.4 per cent in the three months to June 2021, the Office for National Statistics (ONS) has revealed, leading to further questions about the affordability of the state pension triple lock.

The growth in earnings rose from 6.6 per cent in the three months to May 2021 to 7.4 per cent in the three months to June, with Chancellor, Rishi Sunak, required to base the state pension increase on the three months to July.

The government has previously based the increase off of total earnings growth including bonuses, with ONS statistics showing that using this measure would increase the state pension by 8.8 per cent.

If the triple lock was applied to this figure, the new state pension would increase to over £10,000 a year (£10,160), while the basic state pension would increase to £7,784.

However, the ONS noted that it could calculate an ‘underlying rate’, whereby the temporary factors that caused the sharp increase, namely factors caused by Covid-19 such as furlough, would be discounted from the headline figure.

This would give an underlying regular earnings growth rate of between 3.5 per cent and 4.9 per cent.

The law does not specify which measure of earnings growth the government has to use when applying the triple lock.

Industry experts have stated that Sunak could argue that using the underlying growth rate would ‘reflect the intentions’ and keep the 'spirit’ of the triple lock.

“Today’s figures show yet another sharp rise in earnings growth, just one month before the figure used for the state pension triple lock is published,” Aegon pensions director, Steven Cameron commented.

“The earnings component of the triple lock uses the three month average increase to July and with only one month to go, the increase to June is sitting at 8.8 per cent up from 7.4 per cent the previous month (including bonuses)."

Cameron noted that, if this trend continues, the July increase could go into double figures.
“This will surely increase pressure on the Chancellor to find a fair way of adjusting the earnings component to strip out the distortions caused by the pandemic,” he continued.

“The furlough scheme meant many individuals saw a cut in earnings around a year ago, which is now leading to inflated increases as furlough ends.

“The ONS suggest underlying earnings growth with pandemic distortions removed might be between 3.5 per cent and 4.9 per cent. The Chancellor could argue using an underlying growth figure in this range reflects the intentions behind the triple lock, with the upper figure also providing an increase likely to exceed price inflation.”
Former Pensions Minister and LCP partner, Steve Webb, added: “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.”

The state pension triple lock guarantees an increase to the state pension out of whichever is greatest of earnings growth, CPI inflation or 2.5 per cent.

    Share Story:

Recent Stories

Are current roads into retirement delivering member value?
Laura Blows explores HSBC Master Trust’s recent report, Converting pension pots into incomes, with HSBC Retirement Services CEO, Alison Hatcher.

Savings and finance at retirement
Laura Blows is joined by Claire Felgate, Head of Global Consultant Relations, UK, at BlackRock, to discuss savings and finance at retirement. Please click here for an edited write-up of the video

Making pension engagement enjoyable through technology
Laura Blows speaks to Nick Hall, business development director and Chartered Financial Planner at UK-based Wealth Wizards about the opportunities that technology provides for increasing people’s engagement with pensions and increasing their retirement wealth. Please click here for an edited write-up of the video

Pension portfolios – the role of asset-backed securities
Laura Blows is joined by Royal London Asset Management (RLAM) head of sterling credit research, Martin Foden, and its Senior Fund Manager, Shalin Shah to discuss the role of asset-backed securities (ABS) within pension fund portfolios
Incorporating ESG into fixed income
Laura Blows is joined by TCW head of fixed income ESG, Jamie Franco, to discuss incorporating environmental, social and governance (ESG) strategies into fixed income portfolios