Could earnings data cripple the triple lock?

18 June 2021

Strong earnings growth during the three months to end of April 2021 could call into question the state pension triple lock, the assurer Aegon. has warned

Figures from the Office for National Statistics showed average earnings for February to April jumped by 5.6%.

Steven Cameron, pensions director at Aegon, called the figures an “early warning” to the Government for future decisions on the state pension increases under the triple lock system – which grants pensions an increase of the highest of average earnings increases, inflation or 2.5% a year.

According to Cameron: “The earnings figure is based on average earnings increases for the year to July, so all eyes will be on whether the earnings figures in three months’ time show a similarly large increase. If so, the Government will have the difficult decision of whether to stick to the triple lock and grant state pensioners a particularly large increase at a time when many employees may simply be catching up on lost earnings or break their manifesto commitment.

“This raises real intergenerational fairness issues as it’s those of working age who pay for state pensions through today’s NI contributions. One solution might be to average out the earnings increase figures over a three year period.”

The ONS data also showed a 0.3% drop in unemployment levels to 4.7% from February to the end of April. The number of job vacancies in March to May 2021 was 758,000, only 27,000 below the level seen before the Covid-19 pandemic took hold last March.

The strongest quarterly increase was in accommodation and food services, the ONS said.

While industry commentators welcomed the positive figures, they voiced caution as a result of the effects of furlough and potential redundancies on the labour market going forward.

Laith Khalaf, financial analyst at AJ Bell, said: “All the dials in the labour market are pointing in the right direction, but they’re heavily distorted by the gravitational pull of the furlough scheme, lockdown lifting bottlenecks, and the effect of annual comparisons now lapping the first wave of the crisis.

“We won’t get a clear picture of the health of the post pandemic economy until the back end of this year, and that means the Bank of England isn’t going to rush to any interest rate hikes in the next few months, even if the UK looks to be firing on all cylinders.”

Khalaf said the latest delay to lockdown restrictions will serve as a reminder that the pandemic still has the capacity to “derail the best laid plans.”

Khalaf added: “Unemployment is heading in the right direction, but we are still missing around half a million jobs compared to February of last year, not counting the uncertain future of those on furlough. This highlights the economic damage the pandemic has wrought and in all the progress we have made, it’s important to recognise that the reopening of the economy naturally brings with it an element of growth from a very low base.

“The latest figures from the labour market are certainly positive, but it’s probably best to keep the champagne on ice for now.”

Derrick Dunne, CEO of Beaufort Investment, said: “While any fall in unemployment is of course positive, a surge back as a corrective to these numbers is quite possible when the furlough scheme finally comes to an end.

“The boom in demand many pub and restaurant owners are currently experiencing will no doubt safeguard some jobs, but the challenges were compounded for others in the hospitality and entertainment sectors yesterday when the Prime Minister pushed back the date for restrictions lifting.

“The real story, then, is what the government will do now to help affected firms keep as many of their employees in long-term work as possible – and avoid yet more pain for the economy down the line.”

Sarah Loates, founder of Loates HR Consultancy, said: “A further fall in unemployment and more people on payrolls is clearly good news for the economy. But as furlough support starts to reduce, there could sadly be a bloodbath of redundancies. Employers and employees should engage with one another to get people back into the workplace.”

Karen Watkins, founder of Redundancy Support UK, added: “As a business that supports a number of companies with employees still on furlough, the end of the Government’s support scheme is the elephant in the room that some businesses are not yet ready to face.”

Professional Paraplanner