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UK ministers are looking at altering the “triple lock” rule and increasing state pensions next year by less than the 8.5 per cent increase in headline earnings, amid concerns about the state of public finances.
Officials say the government is exploring adjusting the guarantee, which has been in place since 2010 and stipulates that pensions will rise annually by whichever is highest out of earnings growth, consumer price inflation or 2.5 per cent.
The future of the triple lock is one of the most sensitive issues in British politics but Prime Minister Rishi Sunak declined to say at the weekend whether a pledge to keep it would be included in the Conservative party manifesto for the next election.
Office for National Statistics data on Tuesday showed that average weekly pay — the figure normally used to set the earnings part of the triple lock- between May and January — had an annual growth rate of 8.5 per cent.
But officials now suggest the government could choose to remove bonuses paid in June to NHS workers and civil servants to help settle pay disputes from its pensions calculations.
As a result, the increase in pensions would be closer to the figure, also reported in Tuesday’s ONS data, of a 7.8 per cent increase in regular pay, excluding bonuses.
The lower earnings figure would still be the relevant metric for the triple lock since it is greater than both 2.5 per cent and July’s consumer price inflation figure of 6.8 per cent.
However, the Treasury is still braced for a significantly larger increase in state pensions than it had planned at the time of the Budget in March.
No decisions have yet been taken but if Mel Stride, work and pensions secretary, goes ahead with the move, it would mean the new state pension would be set next April at a weekly maximum of £219.80 rather than £221.20.
The maximum rate for the current 2023-24 year is £203.85 a week.
Since the work and pensions secretary has leeway to define the meaning of “earnings”, government insiders say the shift would not technically break the “triple lock” guarantee.
They added that it would not require any special legislation this autumn, unlike a move in 2021 to suspend the “triple lock” after there were huge pandemic-related distortions in the earnings figures.
Ministers and officials say the change to the lock this year is justified because the headline measure is not the best guide to true earnings growth.
The ONS said on Tuesday the metric had been “affected” by “one-off payments” in June and July.
If the government chose to uprate state pensions by “regular” pay growth, it would save hundreds of millions of pounds a year.
Officials maintain that this would save money every year because the triple lock has a ratchet effect, with the effect increased in any given year, compounded by future rises.
The DWP had planned that the state pension would cost £134bn in 2024-25 and will have to spend more next year in any case because earnings growth has been higher than the OBR expected in March.
The £134bn figure was based on an estimate that the government would increase state pensions by 6.2 per cent and an increase of 7.8 per cent would still add more than £2bn to the cost next year.