Another attempt to pick the state pension lock

01 Aug 2016, by Tim Sharp in Pensions & Investment

Former Pensions Ministers don’t retire quietly from public life it appears.

Baroness Altmann, the latest to depart Caxton House, has since criticised the difficulty of long-term policy making in government . And, over the weekend, called for the ending of the triple lock that governs state pension increases.

The cost of raising the state pension by the greatest of inflation, average earnings or a minimum of 2.5 per cent is “enormous”, she says. A double lock of inflation or wages would suffice.

Unfortunately, her intervention risks exacerbating two problems in any discussion about pensioner benefits. It risks perpetuating the myth of the wealthy pensioner and it takes one aspect – that funded directly by the taxpayer- in isolation to the wider pensions system.

Pampered pensioners?

Let’s be clear: the UK state pension is by no means generous. The average income of Britons aged 66 and over (versus that of the whole population) is among the lowest in the OECD group of developed economies. Barely half of pensioners are rich enough to pay income tax. But we have successfully reduced levels of poverty among pensioners to that of the broader population.

The basic state pension is just 16 per cent of average earnings. This compares to 1979 when it was 26 per cent of the average UK wage. In 1980 pension rises were no longer linked to earnings and it dwindled in value over the succeeding three decades.

Over the last seven years the triple lock has only just begun the job of building it back up again (not helped by switching from retail prices index inflation to the usually lower consumer prices index). Low inflation and sluggish earnings growth means that the percentage guarantee has been applied frequently.

Meanwhile, pensioners have not been immune to post-financial crash austerity. Cuts in social care have hit older people particularly hard.

The bigger picture

We also have to understand the impact of scaling back state pension increases. Those affected most will be those with the greatest reliance on the state pension.

Meanwhile, thanks to the collapse of workplace pensions provision over the last 30 years, we can expect large numbers of people reaching retirement with little in the way of private provision. Is this really the time to start scaling back state retirement benefits?

The debate

The risk is that we are entering an era of pension policy making where we are presented with false choices. Spending on the old versus spending on the young. Working people versus the non-working. State pension increases versus state pension age.

There are important questions to be asked about retirement provision. What is an adequate income in retirement? What should care look like and how should it be paid for? What balance should there be between state and workplace pensions?

This is the sort of work that an independent Pension Commission proposed by the TUC and others should undertake. Salami-slicing one bit of the pensions system while ignoring the wider long-term effects smacks of the sort of short-term thinking that so frustrated Baroness Altmann in government.