(Bloomberg) -- The UK government is considering changes to the way the “triple-lock” for state pensions is calculated next year amid an escalating debate over whether the policy is fair and affordable.

Under the proposal, the Treasury would strip out a one-time impact of bonuses paid to public-sector workers to end a labor dispute, according to a person familiar with the proposal, who asked not to be named speaking about measures ministers haven’t yet approved. 

The rethink comes after news of a surprise jump in wage growth left the UK’s 12 million retirees in line for a huge 8.5% increase in the universal state pension next year, costing British taxpayers an extra £2 billion ($2.5 billion). That’s because legislation guarantees that retirement benefits rise every April by the highest of average earnings for the three months to the preceding July, September’s inflation rate or 2.5%.

Scrapping the commitment carries immense political risk for Prime Minister Rishi Sunak, however. Pensioners represent the core support base for his Conservative Party, which is trailing the opposition Labour Party by 20 points in national polls ahead of a general election expected next year. The policy was established in 2010 to end pensioner poverty but it’s become increasingly unaffordable.

Ditching it would be a “laser-guided missile to the heart of the Tory vote,” said Steve Webb, a former Liberal Democrat pensions minister and now partner at advisory firm Lane Clark & Peacock. The Conservatives and Labour are “playing chicken with each other” and hoping that the other would drop the commitment first, so they could then follow suit, he said. 

On Monday, former Tory leader and Sunak’s close ally William Hague intervened in the debate. He called for the triple-lock to be ditched, arguing that it’s unaffordable and unfair to younger generations. Work and Pensions Secretary Mel Stride, who’s responsible for deciding how to adjust benefits and pensions, poured fuel on the debate in an interview with the BBC Tuesday.

“We’ve known for a long time that in the very long term it is not sustainable but of course I’m dealing with now, and where we stand at the moment is we are committed to the triple lock,” Stride said. “As to future general elections, who knows?”

Earnings data from the Office for National Statistics published Tuesday showed average pay growth to July unexpectedly accelerated to 8.5%, which would be the metric used to meet the triple-lock pledge. It would cost Chancellor of the Exchequer Jeremy Hunt £2 billion more than budgeted, according to the Institute for Fiscal Studies, and take the annual bill close to £140 billion.

Bonus Distortions

However, the official wage figures have been distorted by a series of bonuses and salary top-ups agreed with public-sector workers to end strikes. Boosted by one-time payments to civil servants and National Health Service workers, public-sector bonuses were more than 20 times higher in the three months to July than a year earlier — adding as much as 1 percentage point to the headline growth rate, according to economists.

Simon French, UK economist at Panmure Gordon, said it was “very odd to have an indexing value that includes one-off public-sector bonuses – it embeds the price shock.” He pointed to alternative measures produced by the ONS of 7.8% or 6.7%.

That would potentially reduce the additional cost of the state pension compared with the March forecasts to around £1 billion. Anne Marie Morris, a Conservative member of Parliament, also pointed out the distortion during a hearing of the Treasury Committee in Parliament on Tuesday.

The government is “committed” to the triple lock on pensions, Sunak’s spokesman Max Blain told reporters on Tuesday. However, he declined to answer questions on whether the government would include bonuses in the wages figure that’s used to uprate pensions. That decision would take place “later this year” as part of a “formal process,” he said.

If Sunak was to tinker with the lock, it would mark the second breach of the Tory manifesto commitment in the current parliamentary term. While Sunak was Chancellor in 2021, during the height of the Covid-19 pandemic, he scrapped the commitment for a year by suspending the average earnings component from the formula, after distortions caused wages to soar almost 9%.

Hunt is under pressure from Conservatives to deliver tax cuts ahead of an election expected next year. But he told Bloomberg TV on Monday that he’s “unlikely” to have any money to spend at the autumn statement because inflation has been “stickier and debt interest payments higher.” Spending extra money on pensions makes the fiscal situation tighter.

He had just £6.5 billion of headroom against his debt-reduction rules in March, the smallest margin on record, and is expected to use any savings he can find to freeze fuel duties in a move that would cost about £4 billion.

--With assistance from Alex Wickham.

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