The Office for National Statistics (ONS) today released labour market data that showed regular pay increased annually by 7.8 per cent from April to June 2023 which is the greatest regular annual growth rate since comparable records began in 2001.
The average total pay for employees, including bonuses, experienced an 8.2 per cent increase from April to June 2023. This growth rate is influenced by the one-time NHS bonus payments issued in June 2023.
But experts warn that an increase in average earnings growth could give the government more trouble with public pensions.
The ‘triple-lock’ ensures that each year, the state pension will increase by the greater of the average wage growth, inflation, or 2.5 per cent.
The triple-lock is based on the seasonally adjusted wage growth for the three months ending in July, while the primary inflation indicator is the CPI for the 12-month period ending in September.
According to the data released this morning, the growth of wages exceeds the CPI inflation rate, which is currently at 7.9 per cent.
AJ Bell says if this earnings growth figure is repeated in July and used for the triple-lock, this would imply an increase in the old state pension from £156.20 per week to £169 per week.
An increase in the new state pension from £203.85 per week to £220.55 per week. In 2022/23, the government spent £110 billion on state pensions, with the Office for Budget Responsibility (OBR) predicting real-terms state pension spending will rise by £23 billion by 2027/28.
AJ Bell head of retirement policy Tom Selby says: “Spiralling wage growth presents another fiscal nightmare for the Chancellor and Prime Minister, potentially adding billions of pounds to the nation’s state pension bill as a result of the triple-lock.
“If wage growth and inflation continue on their current trajectories, then it will be wage growth in the three months to July that determines next year’s triple-lock increase. Should that wage growth figure come in at over 8 per cent again, the full new state pension could surge past £220 a week, or almost £11,500 a year.
“Increases of this scale will once again spark debate about whether the triple-lock should be retained. Those against the policy will argue it risks perpetuating intergenerational unfairness, particularly if retaining the pledge results in the tax burden on working people being driven upwards. Those in favour of the policy, meanwhile, will likely point to the fact the UK’s state pension is relatively low when compared with other countries.
“A central problem with the triple-lock is that it is a policy without a clear goal as things stand, randomly ratcheting up the value of the state pension in real terms whenever inflation and earnings growth are below 2.5 per cent. It also leaves the government exposed to spikes in inflation or earnings, a flaw which has been brutally exposed in recent years.
“What savers of all ages need from the government is stability when it comes to state pension policy. Ideally, that would come through cross party agreement on how much income the state pension should provide in retirement and how much of someone’s later years should, on average, be spent in receipt of the state pension. Serious consideration should also be given to develop smoothed earnings and inflation measures which can then be used to deliver less volatile annual increases.
“Sadly, there is currently a vacuum of sensible debate on the state pension, with the triple-lock essentially used as a totem for ‘doing right by older people’. It may require another independent review of the state pension to break this cycle and build the foundations of a consensus on what the state pension should look like over the long-term.”
Aegon pensions director Steven Cameron says: “Official figures show that earnings growth has now overtaken price inflation. This may bring some relief for those who have secured a pay increase at or above the national average, but the millions paying far higher interest on their mortgages will see that more than cancelled out.
“One group with a keen interest in how this unfolds are state pensioners. Under the triple lock, state pensions are increased annually in April by the highest of earnings growth, price inflation or 2.5 per cent. The earnings growth figure used is the year-on-year increase for the period May to July, published mid-September.
“The inflation figure used is the year-on-year increase till September, published in mid-October. Both are currently well above 2.5 per cent. The latest earnings growth figure is 8.2 per cent, now above the latest inflation figure of 7.9 per cent. If the earnings growth figure announced next month stays at this level, this guarantees state pensioners 8.2 per cent next April, even if inflation continues to fall.
“The triple lock has come under intense scrutiny in recent years because of the volatility in earnings growth during the pandemic, and more recently because of sky-rocketing inflation, which reached double figures late in 2022 and has remained stubbornly high.
“In April 2022, the Government suspended the earnings component because of furlough distortions, meaning state pensioners received an increase based on the previous September’s inflation of 3.1 per cent which was around half the level inflation had risen to by April 2022. In April 2023, particularly high inflation meant state pensioners received a double-digit increase of 10.1 per cent.
“If earnings growth remains above price inflation in the coming months, state pensioners may be winners, particularly as they are less likely to be affected by rocketing mortgage costs and could also be benefitting from higher interest rates on cash savings.”
Evelyn Partners financial analyst at wealth manager Adrian Lowery says: “Average earnings growth excluding bonuses, which had been expected to tick up to 7.4 per cent in the quarter through June from 7.3 per cent in the previous three-month period, is now the highest on records going back to 2001.
“This above-expectations wage growth will be watched nervously at the Treasury as it threatens to add fuel to the triple lock fire. The wages element of the triple lock – annual earnings growth for May to July – won’t be available until next month but this outcome suggests it could be significant.
“Moreover, strong wage growth is likely to impair the retreat of inflation in the coming months, and the Bank of England recently warned that the pace of wage growth is a threat to its longer-term inflation target of 2 per cent.
“While the consumer prices index for July due tomorrow is widely expected to show a fall in the headline annual inflation rate, there are reported fears in Whitehall that subsequent months could reveal a plateau or even a tick back up in the rate.
“The inflation reading for September, or a possibly even-more racy wage growth figure, will determine what could be a very substantial rise in the state pension and reignite the debate over whether the triple lock is sustainable.
“The cost of the state pension is already expected to outweigh combined spending on education, policing and defence in the next two years. With neither of the leading parties yet willing to question the affordability of the triple-lock in the run-up up to a General Election, this could intensify the squeeze on the public finances.”
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