Likely 4% pension rise next year could help defuse row facing chancellor over winter fuel payment

Among the many figures included in the monthly health check of the UK labour market from the Office for National Statistics one had special significance: the annual increase in average earnings.

That’s not because the other pieces of data don’t matter. The jobless rate (which fell from 4.2% to 4.1%), the number of people in work, the level of vacancies and the days lost through strikes all convey important information about the state of the economy.

But this month there was particular focus on the increase in earnings between May and July compared with the same three months a year ago because that figure – 4% – is used to calculate one component of the pensions triple lock.

UK state pension could rise by about £460 a year from April, wage growth figures suggest

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That’s the formula the government uses to calculate the uplift in the state pension which takes place every April. First introduced by David Cameron’s coalition government in 2012, this guarantees that pensioners receive an increase of whichever is the higher of average earnings, inflation or 2.5%.

Next year’s increase is certain to be based on average earnings, because inflation is running at 2.2%. That may go up a bit in September – the month used to calculate the cost of living component of the triple lock – but experts think only to 2.3%.

Likewise, the earnings figure could well change fractionally, because the 4% annual increase in the three months to July is provisional and subject to revision when the ONS has collected more pay data. But if the past is anything to go by, the revisions will be modest.

As a result, the basic state pension is set to rise by just over £460 a year – or £9 a week – from April. That’s less than half this April’s 8%-plus increase, which was also based on average earnings.

There are two reasons why earnings growth is lower now than it was in the summer of 2023. Firstly, pay awards have come down as the annual inflation rate has dropped from a peak of 11.1% in late 2022 towards its official 2% target. Secondly, the May to July period of 2023 featured one-off bonuses to public sector workers that were not repeated this year.

If the increase in pensions was based on annual regular pay growth – which strips out bonuses – next April’s uplift would have been 5.1% rather than 4%. Last year, however, the increase in total pay was running ahead of the 7.8% increase in regular pay.

The moderation in earnings growth will be welcomed by the Bank of England, which looks closely at trends in private sector pay when deciding on the level of interest rates.

But the 4% figure is also important for the chancellor, Rachel Reeves, who is facing a key vote on Tuesday on her plan to scrap the winter fuel allowance for the 10 million pensioners who are not eligible for pension credit or other state benefits. Reeves will be hoping the likely 4% increase will help defuse the row and limit the number of Labour rebels voting against the move.