Rishi Sunak has pledged to stick to the pension triple lock despite signs the guarantee to older people will cost the Treasury an extra £10bn next year – £2.5bn more than estimated in the spring budget.
The prime minister insisted he was comfortable with pensioners receiving the full annual uplift. The state pension costs the taxpayer £124bn this year and is on course to rise by a further 8% in April, according to the latest economic data.
“Of course the government is committed to its policy on the triple lock,” Sunak told ITV, brushing aside concerns about the affordability of a scheme introduced by the David Cameron-led coalition government in 2010.
Under the triple lock, pensions rise each April by whichever is highest: pay growth, inflation or 2.5%. A period of soaring inflation has seen the cost of the scheme surge since 2022, causing the government’s own spending watchdog to question the long-term viability.
Paul Johnson, the director of the Institute for Fiscal Studies thinktank, said pensioners had received two years of protection from the UK’s cost of living crisis, benefiting from the triple lock last year when prices were rising faster than incomes and benefiting again this year now that earnings were rising more quickly than prices. “That is what the triple lock is intended to achieve,” he said.
Johnson said at some point the future of the guarantee would need to be addressed, but it was hard to see the government abandoning it in the run-up to an election. “Politically, that’s extremely unlikely,” he said.
A breakdown of the result of the 2019 general election showed that support for the Conservatives rose steadily with age, with two-thirds of the over-70s backing Boris Johnson’s party.
Last year’s pension uplift was based on the 10.1% increase in the cost of living in the year in the 12 months to September, but since then the annual inflation rate has fallen back. The July figure, released on Wednesday, showed inflation slowed from 7.9% to 6.8%.
By contrast, annual earnings growth has picked up and was running at 8.2% in the three months ending June 2023. The period used for the triple lock runs from May to July, with the figure scheduled for the middle of September.
Sunak gave no hint that the government was preparing to abandon the triple lock despite warnings from the Office for Budget Responsibility (OBR) of its mounting cost.
He said: “Now there is a statutory, a legal, process for determining the increase in pensions and benefits that happens in the autumn and that’s where those final decisions are made.”
Labour supports keeping the triple lock, with a senior party source saying it was supported as a policy and the government should maintain it.
Dean Butler, the managing director for retail direct at Standard Life, said: “The average wage figure of 8.2% signifies some positive news for struggling UK workers and pensioners. However, if the trend continues into next month and earnings do end up boosting next year’s state pension, even as inflation falls, there’s likely to be heightened debate around the long-term affordability of the triple lock – and by extension, the state pension.”
The state pension accounts for about £124bn of government spending, according to the OBR. An 8.2% rise from next April would take the cost to just over £134bn.
This would mean a rise of £869 a person for those on the full state pension, which is £10,600 this year.
Even before the release of this week’s earnings and prices data, the OBR had stressed that the ageing of the baby boom generation was adding to the UK’s pensions bill. State spending on pensions was on track to be £23bn higher by 2027-28 than at the start of the decade, the OBR said in its fiscal risks report last month.
It said: “The government’s commitment to the state pension triple lock leaves the public finances exposed to higher pension costs, especially in a volatile macroeconomic environment.” The OBR added: “The triple lock has the effect of ratcheting state pensions higher as a share of GDP [gross domestic product] following a shock.”
Johnson said if the triple lock continued indefinitely, pensioner incomes would eventually exceed workers’ average earnings.
“At the moment pensions are 29% of earnings. I would like to see the triple lock used so they reach a target of 33-35% of earnings. Ideally, there would then be policy consensus to hold them at that level,” he added.
Jon Greer, the head of retirement policy at the wealth manager Quilter, said: “Despite the cost, it is unlikely the Conservative government will backtrack on its triple lock promise. Over the last few years, the triple lock has been an area of significant contention and with the next general election looming large the Conservatives will be reluctant to rock the boat with core voters.
“It is inevitable, though, that at some point the uprating of state pensions will be replaced with a less generous uprating mechanism, though exactly what this looks like remains to be seen.”
Adrian Lowery, a financial analyst at the wealth manager Evelyn Partners, said: “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.”
Sunak said the most important thing the government could do was to “continue to bring inflation down more generally” while being responsible about borrowing and spending.
Benefits for people of working age are scheduled to be uprated next April in line with inflation as measured by the September consumer prices index.
