Treasury officials are discussing a one-off break from the pensions triple lock that could save £1bn by preventing a bumper 8.5% increase in the state pension next year.
The government is considering stripping out public sector bonuses that were awarded to workers to prevent strikes over the summer from the calculation that determines the annual rise in pensions.
Ministers will now consider whether to instead adopt an earnings link that tracks the underlying level of pay growth, which could mean pensions increasing at the lower level of 7.8% from April 2024.
Any change to the way the state pension is calculated would be controversial because the Conservatives pledged in their last election manifesto to abide by the formula, which guarantees an increase in line with average earnings, inflation or 2.5%, whichever is highest.
However, government insiders believe they could justify “tweaking” the way that they calculate the annual increase as a one-off, as otherwise pensions would continue to rise far more quickly than wages, which could be regarded as unfair by working people.
The triple lock was temporarily suspended earlier in the parliament when the end of lockdown restrictions led to double-digit earnings growth.
Rishi Sunak refused on Sunday to commit to keeping the pensions triple lock, which was introduced in 2011, in the next manifesto as he grapples with how to fund tax cuts demanded by his own MPs.
Mel Stride, the work and pensions secretary, acknowledged on Tuesday that while the triple lock remained in place for now, in the long-term it was “not sustainable”. He refused to confirm that average earnings including bonuses would be used under the triple-lock formula.
He told BBC Radio 4’s The World At One: “There clearly is a difference if you take into account the non-consolidated elements of pay in recent times, but these are all decisions that I have to take with the chancellor as part of a very clear process, a statutory process actually, that I go through in the autumn.”
In remarks that have offered hope to some Tories that there could be a basis for cross-party talks on the issue, Labour’s deputy leader, Angela Rayner, refused to commit her party to the policy at the TUC conference in Liverpool.
“We will have to see where we are when we get to a general election and we see the finances,” she told the BBC. A Labour spokesperson later said that its position remained one of urging the government to stick to its commitment of maintaining the lock.
The Office for National Statistics (ONS) said annual growth in regular pay from May to July, excluding bonuses, was 7.8%, but one-off payments in the NHS and civil service helped push the overall average including bonuses to 8.5%.
Whitehall sources pointed out the exceptional nature of the one-off payments was demonstrated by an annual average increase in public sector bonuses of more than £1,400. The figures could still be revised next month when final figures for the May to July period are published.
An 8.5% rise in the full new state pension could take it from about £204 a week to £221, or from about £10,600 to about £11,502 annually. But a smaller rise of 7.8% would instead take it from about £204 a week to about £220, or about £11,427 annually.
The Institute for Fiscal Studies (IFS) said the figures meant the state pension, set to be confirmed by the chancellor, Jeremy Hunt, at next month’s spending review, would cost £2bn more than budgeted in 2024–25, taking the annual bill close to £140bn for the UK’s 12 million pensioners.
The former Conservative leader William Hague said it was time to ditch the triple lock – suggesting the cost was “unsustainable” and that the increases were “not something that can go on for ever” without large tax rises or big reductions in benefits for working age families.
Hague cited an IFS report that found that maintaining the triple lock could add as much as £45bn a year to the welfare bill by 2050, putting “insurmountable pressure” on the government to increase the minimum retirement age.
“A runaway train is a fair analogy because we don’t know where it will end up, or at what speed; it’s nearly going too fast already for the train drivers to slow it down, but if they don’t it will end in disaster,” he wrote in an article for the Times.
“The train drivers [Sunak and Keir Starmer] understand this. Neither can afford to commit electoral suicide by being alone in suggesting that some change is needed, even though that is obvious. Sometimes in politics you have to help each other a bit.”
Rupert Harrison, who sits on the government’s economic advisory council, said on X, formerly known as Twitter: “It’s time for an independent review with cross party support & concluding after the next election.” After a muted political responses to the proposal, he added: “Today suggests there may well be political space for this.”
