Mr Hunt’s Triple Lock Dilemma

For the duration of the current Parliament, the United Kingdom (UK) Government has pledged to up-rate the basic State Pension (bSP) and new State Pension (nSP) in line with the ‘Triple Lock’, something that has never been put into legislation.? This was in the 2019 Conservative Party Manifesto as, simply:

The Triple Lock means that the bSP and nSP will increase by the higher of:?

• Earnings inflation
• Price inflation (as measured by September’s Consumer Prices Index (CPI)), or
• 2.5%

When you look at the published figures, you will see various CPI values quoted:?

• CPI – the Consumer Prices Index and the one we are interested in
• CPIH – Consumer Prices Index including owner occupiers' housing costs
• OOH – a component of CPIH which is owner occupiers' housing costs

All have a meaning and all are important for analysts who can use these figures to convey trends.? But as professionals, we are only interested in the CPI value.?

The question, though, is ‘what is earnings inflation’?? This must be defined in legislation.

It’s not there!?

The Social Security Administration Act 1992 (section 150A) in Great Britain requires The Secretary of State to increase pensions in line with a review of the general level of earnings over a review period.? The Social Security Administration Act (Northern Ireland) Act 1992 (section 132A) says that Northern Ireland may make an Order corresponding with that made in Great Britain.?

Yet, there is no statutory definition of earnings inflation, just that the Secretary of State ‘shall estimate the general level of earnings in such manner as he sees fit’.??

By convention, the Government has compared the Nominal Average Weekly Earnings (AWE) from the Office for National Statistics (ONS) for the three months to July in one year and compared it to the following year (i.e. looking at May to July 2022 compared to May to July 2023).?

We need three values, and now we have them all:?

1. Earnings inflation 8.5% (published by the Office for National Statistics (ONS) on 12 September 2023)
2. CPI inflation 6.7% (published by the ONS on 18 October 2023)
3. 2.5%

?So, convention has it that the bSP and nSP will increase by 8.5% in April 2024.

As above, there is no legislative commitment.? However, there is a Manifesto commitment (‘we will keep the triple lock’).? This is, perhaps, more important.??

Legislation is easy to change.? A political commitment is not, especially as April 2024 is the last time that the State Pension values will change before a General Election.? So, as I see it, there are two options:?

1. Keep earnings inflation as 8.5%, or
2. Change the definition of earnings inflation

Remember that the only legislative commitment is for the UK Government (the Secretary of State for the DWP) to ‘estimate the general level of earnings in such manner as he sees fit’).? What this means is that despite any convention, if the 8.5% level is not deemed fit, another measure can be used.?

The Social Security Administration Act 1992 requires the UK Government to increase pensions in line with a review of the general level of earnings over a review period (the May to July comparison above published on 12 September 2023 as 8.5%).? However, this ONS value reflects annual earnings growth including bonuses.??

The ONS said themselves the rate was ‘affected’ by one-off payments and bonuses paid to employees in the NHS and civil service.? Annual earnings growth excluding bonuses was 7.8%.

Here is Mr Hunt’s dilemma, to be figured out before the rate is announced at the Autumn Statement in November.? Regardless of 8.5% or the lower 7.8%, there are two constants:?

1. An increase will still cost the UK Government ￡billions BUT
2. The fiscal drag caused by the freezing of Income Tax thresholds means they will recover some as people pay more tax (or, maybe, tax for the first time)

?PLUS, there are two other factors:?

1. The 2019 Manifesto commitment is, probably, something the UK Government is keen to fulfil, YET
2. Rishi Sunak (then-Chancellor, now Prime Minister) was faced with a similar dilemma ahead of announcing the rates from April 2021.? In an October 2020 BBC Radio 4's Today programme he said ‘we will approach these decisions with fairness in mind - fairness for both pensioners but also for taxpayers’.? On LBC radio he said ‘yes, our manifesto commitments are there… We care very much about pensioners and making sure they have security and that’s indeed our policy’

This dilemma has been faced before and one that I’m glad that I don’t have to muddle my way through.

It’s always interesting to look at the operation of the Triple Lock over the last few years showing the increases that have applied, highlighting the factor that was used (i.e. earnings, CPI, the 2.5% Lock or something else):

For the sake of completeness, note that the ‘additional’ State Pension (the State Earnings-Related Pension Scheme (SERPS)) rises in line with CPI inflation (the 6.7% announced 18 October 2023).