It has been suggested by financial commentators that the pension Triple Lock could fall victim to the Covid-19 pandemic.

A report on the front page of Wednesday’s Financial Times has added weight to the possibility, highlighting a quirk of the calculation which could cost the Government dearly, if no changes are made.

To understand why, first consider the fundamentals of the Triple Lock. The increase each April is the greater of:

1. 2.5%;
2. Consumer Price Inflation to September of the previous year; and
3. Average earnings growth.

It is 3. which is causing concern in the Treasury. This third component of the Triple Lock has never been precisely defined in law, but as a House of Commons’ briefing note on the Triple Lock observes, since 2012 the increase used has been that of average weekly earnings to July in the previous year.

To quote the Office for National Statistics, earnings estimates “…are not just a measure of pay rises as they also reflect changes in the number of paid hours worked and changes in the structure of the workforce, for example, more high-paid jobs would have an upward effect on earnings growth rates”. The latest average weekly earnings numbers, published on 16 June, for the period February-April, show a sharp drop in earnings growth on total pay (including bonuses) to 0.98%, from 2.34% for the previous period (January-March).

What happened between the two was that the effects of Covid-19, both in terms of fewer hours worked, and, crucially, the Coronavirus Job Retention Scheme (CJRS), have come into play. By the time July is reached, the CJRS will be influencing the full three-month period, suggesting that yearly earnings growth could be negative.

For the 2021/22 State Pension uprating, negative earnings growth will almost certainly mean that the 2.5% floor bites – if Triple Lock continues. CPI inflation is likely to be well below 2.5% – the reading for May 2020 was just 0.5% and the economic scales are tipped towards disinflation (or even deflation), rather than inflation. A real term increase of perhaps 2% for pensioners could be a hard sell for a Government faced with rising levels of unemployment.

However, a bigger problem looms for the 2022/23 uprating, which will be based on earnings growth in the year to July 2021. If – big if, admittedly – the UK economy is close to a post-Covid-19 normalisation by July 2021, working hours will be higher than in July 2020. There will also not be 9.1m jobs furloughed, most with correspondingly reduced pay. As a consequence, year-on-year earnings growth in July 2021 could be significant, even though overall it does little more than cancel out the drop recorded for the year to July 2020. For the Triple Lock as it currently exists, a jump in earnings recorded in July 2021 will feed through to higher State Pensions, while the previous year’s dip will have been relegated to an irrelevant factor. Add in the bite of the 2.5% floor in 2021/22 and real terms growth in State Pensions could be more than 5% over the next two years.

Last year’s Conservative Manifesto said “We will keep the triple lock”. Last month Boris Johnson was pressed on the subject by the House of Commons Liaison Committee. His reply was that the Government would meet all its manifesto commitments, “…unless I specifically tell you otherwise”