The latest official figures show average earnings rising by 8.8% in the past quarter. Could this spell the end of the state pension triple lock?
According to the Office for National Statistics (ONS), the average total pay (including bonuses) rose by 8.8% in the latest quarter to June 2021.
Regular pay (excluding bonuses) was up by an average of 7.4%.
A significant driver for this exceptional wage growth is the comparison with earnings a year ago when wage growth was negative.
However, as the economy reopens following the pandemic and the furlough scheme draws to a close, wages have rebounded strongly.
The ONS said in its latest report:
“Average pay growth rates have been affected upwards by a fall in the number and proportion of lower-paid jobs compared with before the coronavirus pandemic and by the base effects where the latest months are now compared with low base periods when earnings were first affected by the coronavirus pandemic.”
What could this exceptional wage growth mean for the state pension, with average earnings one of the three elements used to decide its escalation?
The triple lock guarantees an increase in the state pension by the highest of 2.5%, price inflation or average earnings.
According to Ian Browne, pensions expert at Quilter, the latest earnings figures will give the Chancellor some severe cause for concern. He said:
“The fact that earnings growth has increased from 7.3 per cent in the three months to May to 8.8 per cent in the three months to June suggests the chancellor’s worst fears will become reality and he’ll either have to spend billions extra on the state pension next year and forever after, or make a political challenging decision to tweak the triple lock or scrap it entirely.”
Should earnings growth stay at 8.8% when the reading for September is published, it means applying this rate to the state pension will result in a cost to the Treasury of £8 billion.
By way of comparison, a state pension increase of 2.5% would cost the Chancellor £2.3 billion.
With the government repaying its Covid debts, it seems difficult to justify such a massive expenditure on state pension escalation, despite preserving the triple lock being a crucial part of the Conservative Party manifesto at the last election.