Friday, 19 June 2015


Average earnings rose by 2.7% compared with a year ago. The figure – provisional and for the three months February to April 2015 – was published this week. I'm sure many of you are shouting 'mine didn't' or 'pay frozen for three years' or 'barely 1% in my case'. But that is not the topic. The rise in the official measure of average pay above 2.5% has big implications for the triple lock.

The triple lock, you will recall, raises the basic state pension each April by prices, earnings, or 2.5% whichever is the highest. Prices are now (since 2012) measured by the Consumer Prices Index (CPI) and earnings are measured using the average earnings figure published each month which this month reached 2.7%. 

The CPI used is the one for September – which is published mid-October. 

The average earnings figure uses the measure for the whole economy, seasonally adjusted, taken from May to July, and compared with the same three months a year earlier. It is the figure for total pay (which includes bonuses) and waits for the revised estimate which is published a month after the provisional figure. That final figure is officially the statistic KAC3 for May to July (revised). It is also published mid-October. 

If the figure published four months from now is above 2.5% then it will be inserted in the triple lock calculations instead of the 2.5% floor. So the fact that statistic KAC3 February to April (provisional) is 2.7% is highly significant. Not least because if we look back at the revised figures over the last twelve months and project them forward in a straight line, then KAC3 revised for May to July is projected to be 3.5%. If that turns out to be the true figure it will be good news for pensioners and bad news for the Chancellor.

The Office for Budget responsibility had estimated that the rise in average pay for 2015/16 would be 2.3% and CPI would be 0.2%. That meant the triple lock to fix the state pension next April would use 2.5% leading to a basic pension of £118.85 a week. But if the earnings rise is 3.5% then that would be the figure used instead of 2.5%. If so the basic state pension would rise from its present £115.95 not to £118.85 but by another £1.15 a week to £120.00. The extra cost of that extra rise for 13 million pensioners will be around £700 million in 2016/17. And each year after that the costs will grow as that amount is itself uprated. Over the parliament it could add £4 billion to the cost of the state pension.

The extra cost does not stop there. It also affects the starting level of the single tier state pension due from April which would have to be £1.15 higher than the £154.10 which a 2.5% rise implies. And that figure of £155.25 would then set the benchmark for the future because the triple lock – under present plans – applies to all new pensions from April 2016 paid up to that single tier amount.

In my April blog Triple Lock to Continue I estimated that the extra cost of using the triple lock rather than CPI to uprate the state pension was at least £12 billion and could be up to £17 billion over the current parliament (see If wage growth is higher than the official predictions – and this month’s data indicates it might be – then the extra cost of the triple lock will be even higher.

This blogpost is an based on my Money Box newsletter 19 June 2015. Subscribe here 

19 June 2015
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