Prime Minister Rishi Sunak has affirmed his commitment to upholding the state pension triple-lock, following an 8 per cent surge in earnings growth in June.
The state pension is subject to the “triple-lock,” which requires that it receive an annual rise based on the highest of average earnings growth, inflation, or a minimum 2.5 per cent.
The most significant variables are the CPI for the year ending in September for inflation and the seasonally adjusted pay growth for the three months prior to July for the triple-lock calculation.
Recent data revealed to have an earnings growth rate of 8.2 per cent for the three months up to June, exceeding the 6.8 per cent CPI inflation rate that is now in effect.
The basic state pension may increase from £156.20 to £169 per week and the new state pension from £203.85 to £220.55 per week if the wage growth trend continues through July and is applied to the triple-lock formula.
The Office for Budget Responsibility (OBR) forecasts a real-terms increase in state pension expenditures of £23 billion by 2027/28. In the fiscal year 2022/23, the government spent £110 billion on state pensions.
AJ Bell head of retirement policy Tom Selby says: “Retirees will be breathing a huge sigh of relief after Rishi Sunak confirmed the government will stick to its state pension triple-lock pledge. We will need to wait for July’s earnings figures to come through to know exactly what this means, but if the 8.2 per cent growth we saw in June is repeated, that would increase the full flat-rate state pension to over £220 per week, or almost £11,500 per year.
“The government’s commitment to the triple-lock no doubt has at least one eye on the general election. Chancellor Jeremy Hunt is the man controlling the purse strings and if earnings growth remains above expectations, he will need to find a few extra billion quid down the back of the sofa. This will inevitably re-open the debate about intergenerational fairness once again, particularly if it pushes the government to increase the tax burden on younger generations.
“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.”
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