UK Reviewing Calculation for ‘Triple Lock’ Pension Increase

The UK government is considering an adjustment to the way that it calculates an annual increase in state pension payments, according to a person familiar with the proposal, in a move that could save taxpayers up to £1 billion ($1.2 billion).

(Bloomberg) — The UK government is considering an adjustment to the way that it calculates an annual increase in state pension payments, according to a person familiar with the proposal, in a move that could save taxpayers up to £1 billion ($1.2 billion).

Under the plan, the Treasury would strip out a one-time impact of bonuses paid to public-sector workers to end a labor dispute, according to the person, who asked not to be named speaking about measures ministers haven’t yet approved.

The move could be controversial because it touches on Prime Minister Rishi Sunak’s “triple-lock” promise to ensure that state pension payments keep rising. That was a core part of the Conservative manifesto enshrined in legislation and important to the party’s supporters.

Under the guarantee, pensions rise every April by the rate of average earnings for the three months to the preceding July, September’s inflation rate or 2.5% — whichever is highest. The “triple-lock” was established in 2010 to end pensioner poverty but it’s become increasingly unaffordable.

Earnings data from the Office for National Statistics published Tuesday showed average pay growth to July unexpectedly accelerated to 8.5%, which would be the metric used to meet the triple-lock pledge. It would cost Chancellor of the Exchequer Jeremy Hunt £2 billion more than budgeted, according to the Institute for Fiscal Studies, and take the annual bill close to £140 billion for the UK’s 12 million pensioners.

However, the official wage figures have been distorted by a series of bonuses and salary top-ups agreed with public sector workers to end strikes. ONS data showed that public sector bonuses rose by over 2,000% in July, adding as much as 1 percentage point to the headline growth rate, according to economists.

Simon French, UK economist at Panmure Gordon, said it was “very odd to have an indexing value that includes one-off public sectors bonuses – it embeds the price shock.” He pointed to alternative measures produced by the ONS of 7.8% or 6.7%.

That would potentially reduce the additional cost of the state pension compared with the March forecasts to around £1 billion. Anne Marie Morris, a Conservative member of Parliament, also pointed out the distortion during a hearing of the Treasury Committee in Parliament on Tuesday.

Legislation on the triple-lock allows the government to adjust the uprating, which is ultimately decided by the Work & Pensions Secretary Mel Stride. The July earnings data and September inflation prints are a guide rather than strict rule. 

“As is the usual process, the Secretary of State will conduct his statutory annual review of benefits and state pensions in the autumn, using the most recent data available,” a Department for Work and Pensions spokesman said.

The government is “committed” to the triple lock on pensions, Prime Minister Rishi Sunak’s spokesman Max Blain told reporters on Tuesday. However, he declined to answer questions on whether the government would include bonuses in the wages figure that’s used to uprate pensions. That decision would take place “later this year” as part of a “formal process,” he said.

Hunt is under pressure from Conservatives to deliver tax cuts ahead of an election expected next year. But he told Bloomberg TV on Monday that he’s “unlikely” to have any money to spend at the autumn statement because inflation has been “stickier and debt interest payments higher.”

He had just £6.5 billion of headroom against his fiscal rules in March, the smallest margin on record, and is expected to use any savings he can find to freeze fuel duties in a move that would cost about £4 billion.

–With assistance from Alex Wickham.

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