How important is the Triple Lock?

Most retired people do not rely solely on the basic state pension—but some do

May 04, 2017
©John Stillwell/PA Wire/PA Images
©John Stillwell/PA Wire/PA Images

With a snap general election looming, the parties have made thinly veiled efforts to court a group whose propensity to turn out and vote was underscored by the result of the referendum last year: pensioners.

Labour, badly trailing in nearly every national opinion poll, has vowed to protect one policy—the so-called Triple Lock on pensions—that the Conservative-Liberal Democrat coalition introduced in 2010. In contrast, the Tories, confident in their double-digit lead, are silent on whether their pledge to hold the Triple Lock is written in stone.

The Triple Lock is a guarantee to uprate state pensions annually in line with either inflation, wages or 2.5 per cent, whichever is highest. At a time when benefits for the working-age poor are being frozen or scaled back, the vow to protect pensioners—a group whose fortunes have been least damaged by the recession—has stoked intergenerational conflict and accusations of pandering.

But the debate obscures a larger issue: why are British state pensions so meagre? The OECD calculates that the UK’s basic state pension is third lowest among the 33 member states. Chris Curry, director of the Pensions Policy Institute, points out that the Triple Lock is an effort to make up a decline in purchasing power that began under the Thatcher government in 1980. In 1979, when the basic state pension was 26 per cent of median wages, new legislation tied future increases to rising prices, severing the link to wages, which then rose by an average of 2 per cent more each year than inflation. By 2008, retirees living only on basic pensions were receiving benefits equal to just under 16 per cent of average wages.

One obvious reason Britons have put up with this, says former shadow pensions minister Gregg McClymont, is the availability of private, often workplace-based, pensions. Britain has been far more willing than almost any other OECD member to offer incentives for private saving. The OECD’s calculation of pension-linked “tax expenditure”—effectively lifting the requirement to pay tax on income if it is used in certain ways—shows Britain far exceeds pension spending by nearly any other country except Australia. HMRC data shows that tax expenditure totals around 3.2 per cent of GDP, delivered through a variety of channels not just in the form of relief on contributions and investment gains, but also in lower National Income Contributions required of workers and their employers.

To put that into perspective, that figure is about three-fifths of what Britain currently shells out on basic state pensions (which are 5.5 per cent of GDP). But despite the hefty tax expenditure on private pension savings, the benefits are lopsided. Data from PPI show that as of 2010-11. the year in which serious limits were set on tax expenditure for pension savings, roughly 70 per cent of that went to households in the two top income deciles.

Official data show that roughly 70 per cent of pensioner households have some form of private provision either through occupational or personal pensions. It is those who have live solely on the state benefit that need the Triple Lock the most—and they are left too poor to protest or organise effectively. “Those most damaged by the low state pension are those who are basically voiceless,” McClymont said.

And with rising longevity beyond state pension age expected to continue for the next century, the delicate balancing act of affordability and fairness will keep on going.