What is the state of play regarding the UK state pension?

The last 24 hours have seen the issue of pensions come to the fore in the UK General Election debate. Much of this was triggered at Prime Ministers Questions yesterday.

Theresa May has refused to commit a Conservative government to retaining the “triple lock” on pensions during a boisterous final session of prime minister’s questions before the election. ( Financial Times).

For those unaware of what it actually means the FT helps out.

which increases the basic state pension by the highest of three indicators: consumer price inflation, average earnings growth or 2.5 per cent.

This policy has had consequences which I will look at in a moment and the Prime Minister did refer to one of them although care is needed with any number provided during an election campaign by a politician.

The prime minister also referred to the triple lock in the past tense, saying it “had” boosted incomes by £1,250.

She presumably means per year.

The cost of the Triple Lock

Back in September 2015 the Government’s Actuaries released a report stating this.

A hastily buried official report has estimated that the government is spending an extra £6bn a year protecting pensioners’ incomes and warns that the cost of doing so in future years could spiral further.

What this has done at a time of claimed austerity is to put pressure on the UK public finances.

The GAD report said the triple lock was already costing around £6bn a year, with £70bn in total spent on the state pension in 2015/16 — more than the combined education and Home Office budgets.

Also it had been in play at a time when real earnings growth has been weak which led to this.

The government report said that since 2010, the guarantee had meant that pensioners’ income was £10 a week higher than it would have been had their income been uprated by earnings alone.

So there had been a transfer from workers to pensioners. If we move to last November the Parliamentary Work and Pensions Committee updated us on the state of play. From the BBC.

As a result of triple-lock policy, the state pension has risen by a relatively generous £1,100 since 2010, with an increase of 2.9% in April this year.

The Committee concluded this.

However, MPs said that while pensioners had done well out of the triple-lock, young people and working-age families had suffered unfairly.

So-called Millennials, born between 1981 and 2000, face being the first generation in modern times to be financially worse off than their predecessors, they added.

MPs said the rising cost of the state pension – £98bn in the last tax year – was now unsustainable.

The Triple Lock has achieved its target

The rationale for the Triple Lock was explained by the BBC.

Historically, pensions were linked to inflation rather than earnings, which reduced pensioner incomes relative to those of the working population.

The economic objective was to bring them more into line and of course there was a political aim as part of this as pensioners are the group most likely to vote. But if we look at what happened next we saw a combination of circumstances and indeed a Black Swan event. Step forwards the Office for Budget Responsibility!

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

In this world pensioners would see incomes rise with average earnings and there would be no transfer from workers. We are of course reminded of my first rule of OBR club ( which is that the OBR is always wrong…) as the Work and Pensions Committee moves us from Ivory Tower fantasies to reality.

Low rates of earnings growth following the 2008–09 recession

This means that in reality the increases have been driven by consumer inflation and the 2.5% back stop more than earnings.

The BSP ( Basic State Pension ) was uprated in line with CPI in 2012–13 and 2014– 15, earnings growth in 2016–17 and the 2.5 per cent minimum in 2013–14 and 2015–16.

The Black Swan event was the drop in official consumer inflation to in essence 0% which impacted on the 2015/16 numbers which again brings us to the first rule of OBR club as of course it assumes 2% inflation until the end of time.

The irony of all this is that the original objective is in sight.

Provided the new state pension is maintained at this proportion of earnings the work of the triple lock, to secure a decent minimum income for people in retirement to underpin private saving, will have been achieved.

However there has been a cost to this.

Reform, a think tank, estimated that the triple lock will in 2016 result in annual state pension expenditure £4.5 billion higher than it would have been had a simple earnings link been in place. This gap can only grow.

The rising state pension age

One area that is awkward is the way that current pensioners benefit from the Triple Lock but future pensioners find that the system looks increasingly unaffordable and of course they have to wait longer to get theirs. Last Month Retirement Genius reported this.

John Cridland, the independent reviewer of the state pension age, made three key recommendations.

First, that the state pension age should rise from 67 to 68 by 2039, seven years earlier than currently timetabled…..The second report by the GAD presented a scenario of faster rises which could see those aged under 30 only having access to the state pension by the age of 70.

So there was potentially grim news for Millennials who seem only to get bad news don’t they?

Should we take it away from the well-off?

This suggestion has been floated in the Financial Times today.

The UK should not give a state pension to the rich and instead use the money to boost payments to the poor, the OECD has said. The Paris-based club of mostly rich nations said cutting payments to the wealthiest 5-10 per cent of retirees would “free up resources” to raise British pensions, which are low compared with other wealthy nations, for others.

An interesting idea and considering its readership group it is brave of the FT to print this! Whilst in itself it seems to have things in its favour (redistribution) there are catches. For example higher income groups will be paying income tax on this and sometimes at higher rates of it. Also there is the belief that this is a system that is paid into and we are excluding the group who in general will have paid the most. Of course reality is not like that as they paid in fact for their predecessors pensions but even so it is a little awkward.


There are various issues here. The first is the irony that the Triple Lock is under fire for in essence doing what it was aimed at which was pensioner poverty. It is not a cure but it has helped by raising the Basic State Pension. The catch has been the economic environment where low rises in real wages have combined with the choice of a 2.5% back stop to the increases have made it not only increasingly expensive but also the equivalent of throwing the Ring of Fire into Mount Doom to the forecasts of the OBR Ivory Tower.

So we have an issue of possible failure by success and if it has been that then it was the 2.5% back stop which has caused it combined with other choices such as limiting other benefit increases to 1% per annum. It is a complex mixture which looks unfair basically because it is.

We also live in a world where there are so many ch-ch-changes to state pension entitlement and whilst going forwards the state pension was raised a year ago there was a catch which resonates with me.

One of biggest changes to state pension in 2016 was scrapping of right for spouses to inherit partner’s pension when they died. ( Josephine Cumbo )

This is because when I sorted out my mother’s financial affairs after my father’s death she benefited from inheriting some of his state pension.

The establishment

They seem to be doing okay as this tweet about the retirement party for the Director of the Tate Gallery Sir Nicholas Serota suggests. The asterisks are mine.

Lots of Tate staff are outsourced, low-waged and/or on zero hours contracts. Tate are asking them to help buy Nick Serota a f**king yacht. ( @charlottor )

Me on Official Tip TV


22 thoughts on “What is the state of play regarding the UK state pension?

  1. Interesting, as always.
    The SP is around £115 for an individual (ish).
    The minimum amount to live on is around £169/wk (all figures are “ish!)
    So pension credit tops it up, which is a means tested benefit.
    There are two types of pension credit: savings credit and guarantee credit.
    Savings to those with an additional incone to basic SP (such a SSP).
    Guarantee to those on basic SP. Guarantee gives you a loads of health benefits, such as free dental and optical care.
    So a person on basic SP would get guarantee credit to £169 + other benefits to add-on.
    However, as the SP rises, pension credit falls!
    So the “poor” pensioner sees a small rise in income, while the richer one sees a larger rise.
    As always with benefits, some win, most lose!

  2. Hello Shaun,

    It really a political question ;- universal or means tested

    yer pays yer money and take the risk

    eventually AI will take most jobs and we’ll be left with the conundrum for a Capitalist society .

    Who can afford goods and services provided if the consumer has no income ?

    State basic income replaces the pensions? , ie State pension for life?

    I’ll let the reader work out if thats possible

    Me? I think its Dune or Homeworld , both are dystopian


    • Hi Forbin

      As you know I am a Dune fan although I have been reading some of the Foundation saga again where for a period mankind goes backwards. Also if there are any hyper intelligent robots helping us out they are hiding themselves very well!

  3. Great article as always Shaun.

    I fully expect there will be no state pension when I retire. I’m in my forties at the moment, and will be impacted by study you mention. What annoys me is that people with gold plated pensions make it difficult for people who don’t wish to rely on the state.

    Every year the max pension pot decreases and yet public sector officials have pension pots well in excess of this. When my daughter retires, if the boe get their way £1m would buy a loaf of bread.

    My biggest worry is that people are not saving for retirement, and will reach retirement age with nothing. When generation X retire, I think a stark contrast will appear. I’m sure the government will be happy to appropriate prudent savers pensions and isa’s to pay for the shortfall…

    • Hi Anteos

      There are lots of begged questions in the whole process and the era of very low interest-rates and yields makes it very difficult for pension plans. Looking forwards from your daughter’s perspective must pose so many issues and with all the demands on money how much will her generation be able to save?

  4. £50,000 for a degree,£140,000 for a small terrraced house in the Midlands,no money left after basic costs to save for a pension.If my generation 40’s is in trouble,then todays 20’s are really in the mire

    The golden age of retirement is gone.

  5. It is ironical that we now have talk about pulling back on the SP when it has actually become more important.

    Not so long ago we had a large DB element to pension provision that offered reasonable to good benefits (not so good as said because of the treatment of early leavers for one thing), a robust and significant component of pension provision. DB schemes have now largely disappeared from the private sector and very few now have this benefit and are on DC schemes.

    DC schemes in their turn have been made hugely more expensive by low interest rates and annuities are now much more expensive. Many people in their fifties are going to receive a shock when they find out that, not only can they not retire early, but even if they stay the course their pension will be very low, far lower than they might have been expecting.

    So, at a time when we could be said to need the underpinning of the SP even more there is talk of pulling back on it. There’s perhaps a subtle message in there somewhere and I have a feeling that it’s not a good one.

    • Hi Bob J

      There are as you say quite a few problems. We are told we are better off but yet we pile debt on students and reward current pensioners at the expense of future ones. Of course some pensioners are not well off but the establishment certainly makes sure its ones are, like the Bank of England for example.

  6. Great article. Just stepping back from the detail, I would be very surprised if any fixed formula like this could survive for more than a few years. It’s a bit like the Euro – a very small annual effect (terms of trade for the Euro) soon builds up

    • Hi James and thank you

      It was the choice of 2.5% as a minimum “wot done it” if we switch in Sun Terms I think. Back in 2010 it would have seemed “normal” but of course very little has been normal in the credit crunch era. So as you say any fixed formula is much more risky than it seems.

  7. “Historically, pensions were linked to inflation rather than earnings, which reduced pensioner incomes relative to those of the working population.”

    So now that the artificially low rigged inflation data from the government is now actually higher than real wage rises, the government reckon that pensioners should now be worse off than workers that are unable to keep up with the rigged rate of inflation!!! – unbelievable!

    Of course, when wage rises were higher than inflation(anyone remember then?) it suited the govt to increase pensions by inflation, now the situation has reversed, pensioners must take the lower figure again!!!

    This is against a backdrop of the retirement age being pushed back with increasing regularity and a ZIRP by the Bank of England which causes returns on annuities to effectively zero punishing retirees further, and Theresa May informing us she will maintain Foreign Aid at 0.7% of GDP, currently running at some £13bn a year whilst informing us that we cannot afford to maintain pensions increases at their current rate!!!

    Don’t even get me started on the Bank of England employees and MP’s inflation proofing THEIR pensions!.Words seldom fail me, but on this occasion, I make an exception.

    • Hi Kevin

      You may be interested to know that my first venture into this sort of thing was around 15 years or so ago when I had a look at MPs pensions. There were some changes which by my calculations were very favourable to MPs and frankly out of kilter with other developments as well as being unaffordable. I ended up having correspondence with the Leader of the House who was Harriet Harman. The response was that everything was fine. 2/3 years later some £30 million or so was pumped into the scheme. Little did I know I was ahead of events as the expenses scandal later blew up!

      Only on Wednesday I was reading yet another article that inflation is really 1% below what we are being told. Somehow it missed out the cost of hosuing…

  8. Great blog as always, Shaun.
    People in the UK should be interested in following the fortunes of two plans in the US for addressing social security that have emerged from the US House Ways and Means Social Security Subcommittee, the Republican Johnson plan and the Democratic Larson plan.
    The Johnson plan proposes using the chained CPI for upratings of social security, which would tend to reduce benefits, the Larson plan using the CPI-E for the elderly, which would tend to increase them. The CPI-E updates its basket every two years like the US CPI-U for urban households and the CPI-W for wage earners, and so is subject to the same upper level substitution bias as them. If you follow some of the links provided in the paper, a compromise has already been suggested: calculate a special chained CPI for elderly households.
    If you translate this debate into UK space, the UK CPI or the UK CPIH is obviously not fit for purpose in uprating pensions and should be replaced by some kind of household inflation index. To my mind, this should be based on an annually linked index with a formula that satisfies the time reversal test, which would largely eliminate upper level substitution bias like the US chained CPI. Whether it should be based on a basket for the elderly is another matter. There is no logical reason to believe that an alleged downward bias in measuring the inflation rate of this group or that group using a special basket will persist over time. In the US, part of the debate has centred on quality adjustment issues. While measured health care costs have increased faster than inflation in general, some critics believe these costs are grossly overestimated, failing to correctly adjusted for improvements in the quality of care. They argue that the higher inflation rates for elderly Americans reflected in the CPI-E are simply a mirage. However, there seems to be a lot of support for the idea of HIIs for different demographic groups. I suspect that an HII for the elderly may be calculated, and could become the basis for upratings of pensions in the future.
    Of course, if your goal is, over the long-term to do more than simply adjust pensions for cost-of-living changes, as is the case with the triple lock, then you aren’t necessarily unhappy that an index used for upratings overestimates inflation; rather than a defect this is just a design feature. To my mind it would be better to keep the goals of adjusting pensions for inflation and boosting the real value of pensions separate, but that is just my view.

    • Hi Andrew and thanks

      Your comment poses some really good questions and reminded me the UK does have a pensioner inflation index and that I hadn’t looked at it for a bit.

      “The main differences from the RPI in the construction of the pensioner indices are as follows: section weights are derived from information on expenditure by one-pensioner and two-pensioner households respectively (section 7.6); canteen meals (including state school meals) and all housing sections are excluded. The exclusion of housing sections was made on the grounds that the price indicators used in the all items RPI would not be appropriate and would overstate the price increases experienced by these pensioners as they would mostly be cushioned against some rises by rebates. Also, it would be technically difficult to compile separate house price indicator items for these households. Other items are also excluded, including NHS prescription, dental and eyesight test charges, which are
      not paid by pensioners. For rail and bus fares, special pensioners’ rail and bus fare indices are substituted for the normal index household indices to allow for fare concessions available in some areas.

      The item weights differ from those in the RPI sections where there is evidence that expenditure patterns
      within the section are very different for pensioner households. ”

      I think they are right to weight for the age group. As to the numbers they are only quarterly but in the year to December the 2 pensioner household group saw inflation of 2.3% and it will be interesting to see the March figure.

      On this measure pensioners saw ~0% inflation for a couple of years just like everyone else.

  9. Shaun,
    Of course pensions are a mess. When the state pension was first introduced, on average a manual worker (man) only claimed for 2 years before he died.
    The increase in longevity have been firmly swept under the carpet by politicians and the public ever since.
    As for DB pensions, does anybody remember the “pension raid” by Gordon Brown? It was estimated at the time (1998?) to have cost the pension industry £5,000 million p.a.As we also know, various Governments have been quietly attacking the pension industry (and thus DB pensioners ever since.
    I remember two instances about pensions from 20 years ago, when I was living in Nottinghamshire. One was no pension company would quote the company I worked for an RPI indexed pension (3% was the max). How come the B of E still has this? The second was the cost of pensions for the police force, which was 30% of their budget! No wonder my rates keep increasing.
    There does need to be an education program to explain to people the cost of pensions and the returns that can be expected. At present with nearly zero returns a pension of £20,000 a year for 20 years needs to be £400,000 (no inflation included). If we assume a 40 year working life this means £10,000 a year contribution.
    In other words we and the politicians have promised ourselves the unaffordable.

    PS Forbin
    Tell your son to get married, or the modern equivalent, and then the £200,000 house will only be 4 times joint income.

    • Hi Nick

      We have discussed on here before that it now takes 2 incomes to make a house purchase look affordable as opposed to the one of the past. Progress?! Oh well…

      As to DB pensions as well as the raid you mention there had been a period when companies had been allowed to pay in less as things were going so well, everyone reading this can guess what happened next..

      If there was a musical theme it would be a combination of “Promises” by Eric Clapton and “It’s a mistake” by Men At Work.

  10. As if the SP in the UK were a golden egg! I think that the Euro area SP’s (I benefit from bits of 3 schemes) are much more generous for full contribution records. Just as well we are leaving, as inevitable ‘harmonisation’ throughout EU would bankrupt UK ltd. in a few years, in addition to the self-inflicted wounds.

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