‘New inflation and earnings data make triple lock pension ‘fudge’ much more likely’

With average earnings data yesterday showing a rise of 5.6%, and this morning’s data showing a jump in CPI to 2.1% (up from 0.7% two months ago), the process of setting a new state pension for April 2022 is likely to be an expensive one. But, according to new analysis by LCP partner Steve Webb, the likelihood is that the Chancellor will end up ‘fudging’ the figures to scale back a multi-billion pound state pension hike.

Under the Triple Lock policy, the basic state pension and the new state pension are increased by the highest of:

• The growth in average earnings
• The growth in prices as measured by the CPI
• A floor of 2.5%

In addition, it is a legal requirement that the increase has to be at least in line with average earnings.

Although price inflation is increasing rapidly, earnings are growing much faster. This means that it is likely to be the earnings element of the Triple Lock which is the largest when the decision is made in the Autumn on the state pension rate for April 2022.

According to the ONS, the earnings data is artificially high for two reasons:

1. ‘base’ effects – a year ago wages were depressed because of the start of furlough; the current increases are not (in general) because workers are getting large pay increases but simply because wages are being restored to their pre-pandemic levels;
2. ‘composition effects’ – job losses in the last year have been more heavily concentrated in lower-paid sectors; removing lower paid jobs drives up the average pay in the economy, simply because there is now a different mix of jobs;

The ONS estimates that without these two effects the 5.6% growth figure would have been more like 3%.

The exact figure used by the Chancellor is fiscally important. Total spending on the elements of the state pension system which are covered by the triple lock policy (the basic pension and the new state pension) is around £85bn, so each extra 1% adds £850m permanently to the cost of paying pensions.

This suggests the Chancellor has two options if he wants to maintain his manifesto commitment to the Triple Lock without spending huge sums:

1. He could say he is sticking to the Triple Lock but measuring ‘underlying’ earnings growth without the ‘distortions’ noted above; at current figures this would mean using 3% rather than 5.6%, saving around £2 billion per year;
2. He could decide to apply the Triple Lock formula over a two year period, which would mean that this year’s earnings surge would be partly offset by last year’s earnings fall;

The Chancellor does not have to make a decision yet, but he will be nervously watching the earnings data, especially if it continues to rise over the next few months.

Commenting, Steve Webb, partner at LCP said:

“Even without the Triple Lock policy the Chancellor has a problem because the law requires him to link pensions to earnings growth as a minimum. Current earnings figures are soaring away and a simple link to earnings growth will result in a multi-billion pound bill. There can be little doubt that the Chancellor will be looking for ways to ‘fudge’ the earnings figures. This could be by using some measure of ‘underlying’ earnings growth which would be much lower than the headline figure. Or he could try to average all the triple lock figures over a two year period which would dampen the overall rise in earnings. There can be no doubt that Treasury officials will be very busy over the coming months looking for creative new ways to measure the growth in wages”.

Steve Webb has today published a new blog setting out the arguments in more detail: Where are we heading for the next state pension uprating? | Lane Clark & Peacock LLP (lcp.uk.com)