Rebecca Deegan, Head of Policy at the IFoA considers whether it’s time to take another look at UK pensions uprating.

Rebecca DeeganToday the House of Lords Intergenerational Fairness and Provision Committee has recommended that ‘the triple lock for the State Pension should be removed. The State Pension should be uprated in line with average earnings to ensure parity with working people.’

The report mirrors previous warnings from the Government Actuary‘s Department, and the Work and Pensions Select Committee that the policy is unnecessary, and unsustainable. In spite of this, both of the UK’s main political parties have committed to continue the policy until at least 2020, despite it arguably being made redundant in 2016.

Between 1980 and 2010 the value of the State Pension was steadily eroded relative to average earnings. The introduction of the triple lock was important in reversing that decline and in tackling pensioner poverty. However, the introduction of the new State Pension in 2016 restored the value of the State Pension relative to minimum income standards, and arguably means the triple lock is no longer necessary.

The triple lock policy guarantees an increase to the State Pension every year by a minimum of 2.5 per cent. In the event that growth in average earnings outstrips inflation and 2.5 per cent, then the triple lock costs no more than an earnings link. But recently the increase in benefits from the triple lock has exceeded the increase in average national earnings, as those in work have experienced stagnant wages and benefit freezes. The consequent ratchet effect sets the State Pension on a permanently divergent – and arbitrary – upward trajectory relative to both earnings and prices. This raises questions around intergenerational fairness between today’s working age population and those above working age. 

Changing demographics, and the UK's ageing population, further exacerbate the effect of the triple lock on intergenerational fairness. The ONS reports that in 2017 around 18.2% of the UK population was aged 65 years or over, compared with 15.9% in 2007; and it is projected to reach 20.7% by 2027. As this demographic continues to grow, and people continue to live longer, expenditure on the State Pension as a share of GDP will continue to increase.

The UK's pay as you go system means that State Pension expenditure is met by the working age population. As the proportion of older people in the population grows relative to those of working age, this will inevitably place a greater strain on the working age population. This has led the Government Actuary’s Department to conclude that the triple lock policy is not sustainable over the medium term. In fact, they conclude funding for State Pensions will run out by 2032 if there are no changes to current policy.

It is important that pensioners are not left behind with a stagnant State Pension as the cost of living rises, and the successes of the New State Pension in bringing up pensioner incomes up to an acceptable standard should not be underplayed. But ensuring the State Pension remains sustainable and affordable over the long term should also be a priority.