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Steve Webb: Why we must stick with the triple lock policy

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By how much should the state pension be increased every year?   Attached to this seemingly innocent question is a multi-billion-pound price tag and a great deal of political controversy. Given the tendency of older people to turn out and vote, the politics of generous annual increases to the state pension seem pretty clear. But if we are interested in good pensions policy, what is the right approach going forward?

For 30 years, between 1980 and 2010, the answer to this question was simple. The state pension would rise each year in line with inflation, measured by the retail prices index. In this way, the spending power of state pensions would be maintained each year. However, there were two problems with this approach.

The first is that when headline inflation was very low, the cash increase in the state pension was embarrassingly small. When the September RPI was published in 1999 the rate was just 1.1 per cent, which meant the April 2000 increase was a meagre 75 pence. Although the government went ahead with this increase there was a huge political backlash. The following year, it felt obliged to hike up pensions by an inflation-busting £5 per week, implemented just before the 2001 general election.

The second problem with long-term price-indexation is that pensions are about helping you to maintain your standard of living in later life when you no longer have a wage. This means that, to do its job, a pension has to have some relation to what you used to earn. If the pension has been pegged to prices rather than to wages, then there is a growing risk your living standard will slump at retirement.

As a result of this relative decline over a period of decades, pressure grew to “restore the earnings link”, or to increase pensions by the higher of the growth in prices or earnings. The legal power to do this was included in the 2007 Pensions Act but the policy was only implemented under the coalition government.

The coalition actually decided to go further and introduce a “triple lock” on the basic state pension. Not only would pensions increase by the higher of the growth in prices or earnings but they would always rise by a minimum of 2.5 per cent. In part, this was a political device to avoid a repeat of the 75p fiasco, but it was also a deliberate upwards ratchet to start to reverse 30 years of relative decline in the value of the state pension.

The triple lock has been in force for just seven years and in my view it is premature to talk about scrapping it. The basic state pension is just over £119 per week and even the Department for Work and Pensions does not think that is enough to live on. Millions of pensioners have so little income they have to claim means-tested top-ups such as pension credit or housing benefit. Worse still, many of those entitled to top-ups fail to claim them and end up living below the poverty line.

Another important reason for good state pension indexation relates to increasing longevity and the changing mix of pensioner incomes. In the past, many people would retire with a state pension and an index-linked company pension, and would have a relatively short retirement before they died. This combination would enable them to maintain their living standards through retirement. Now, however, many more people will retire with a state pension and a defined contribution pension pot, which few people use to generate an inflation-protected income.

What is more, they may well be drawing a pension for a quarter of a century or more. If their private pension income is frozen in cash terms, then decades of inflation will substantially erode its real value. This makes a generously indexed state pension all the more important if we are to avoid increased poverty among the “old elderly”.

Some will say we cannot afford the triple lock but that is to take just one element of the system in isolation. Overall, the future cost of state pension provision has been substantially reduced compared with previous plans. State pension ages have risen sharply and will continue to increase. Indexation of other parts of the state pension system (mainly the Serps scheme) has been reduced from RPI to CPI, and the new “flat-rate” state pension costs substantially less than the system it replaced by the middle of this decade.

We have been moving from a situation where state pensions are paid relatively early and at a very meagre level, to one where there is a decent state pension paid at a realistic age. The triple lock policy has been a key part of that mix. This is a journey in the right direction and one which we should continue.

Steve Webb is director of policy at Royal London

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. We have such mixed views on life and responsibilities and we need a consistent approach for the future. People won’t just live an extra 10-20 years soon, with medical advances we could all be well past 100. We already have the living wage, huge education and work Opportunites and everyone had chance to build a life and career if they choose to do so. Either we have to make people more responsible for their own lives and finances and accept that the state pension is just a backstop against poverty and people are educated not to rely on it- or we may need a completely different model that redefines work/life balance, when more jobs will be completed by robotics and AI and we will need a really big rethink- to do that we need long-term thinkers who aren’t worried about elections or personal gain. We need to educate everyone better- they need to understand the costs of support and not just expect it as a right. Paying state pension while someone lives into their 100s is not going to work on current thinking.

  2. Agree, Jane. Speaking as someone who has recently hit 60, I regard Mr Webb`s arguments as spurious and wide of the mark. Scarce resource should be applied to the young who, given the demise of DB and increasingly reckless use of QE will find it hard enough to build up retirement savings of any significance. The message needs to be conveyed that Big State doesn`t work, as Venezuela has discovered.

    • If like you say Phillip the big state pension scheme will not work in the future, will the young at least be allowed to have the option to opt out of this calamitous system? If this is a benefit which is reducing in relative terms continuously going forward, it would be self-evident that it would be disadvantageous for new joiners to arriving in this system to receive a benefit that is reducing in real terms. Seeing that it is generally accepted that current state pension provision is inadequate) is should be abandoned with immediate effect as can you imagine how inadequate it will be in 40 years.

      Sadly the trouble with ponzi schemes is someone somewhere needs to foot the bill eventually. Call it what you want but the state pension landscape is a ponzi scheme currently. The only question is, will it be the young, the middle aged or those currently retired who pay for it? I sadly believe that it will be the young who will have to continue to fund this calamity and to get very little or no pension when/if they retire.

      To answer the authors question, I would assert that the only suitable pension policy is to abolish the state pension scheme because the current fiscal & monetary landscape makes funding these undefined liabilities untenable. They are undefined by the simple fact that older people have been and are living for longer. The result so far of this pensions experiment so far has been that people have enjoyed an extended retirement and in many cases (those with early retirement ages) have been retired for longer than they worked. Although this is good news that people are living longer, the issue has been that the following generations have been made to foot the bill. These are unfortunate facts.

      The best solution would be for the government to immediately start offering CETV’s like DB schemes to reduce the burden on the state for all those currently in the system in work and in retirement. Better that the burden be known now than it to be unknown as we cannot control how long people live.

      We are sitting on a ticking time bomb, best a controlled demolition than a nuclear bomb. The failure to address this will lead to inter generational warfare, apathy, resentment and general social unrest.

      Lets sort out this mess now and stop kicking the can down the road.

  3. Andy Robertson-Fox 10th August 2016 at 2:11 pm

    “All State Retirement Pesnions payable to pensioners living outside the UK shall be subject to annual uprating by the same percentage rate as is applied to such pensions payable to pensioners in the UK”….former Shadow Minister of Pensions Steve Webb.
    He was appointed the Minister of Pensions in the Coalition government and immediately claimed he had never promised frozen pensioners a penny; it was not in the manifesto, he said.
    He did nothing.
    He now claims that the triple lock should be retained despite the projected cost but makes no suggestions as to how it can be financed….and he couldn’t or wouldn’t find the chickenfeed by comparison £580 million to bring the parity he spoke about as shadow minister to the 4% of UK frozen pensioners.
    Why should one accept what he now says as a former minister and MP who lost his seat?

  4. The Triple Lock argument is a red herring, we need a review of the whole state pension system and consider options such as tapering it for those with other income over a certain amount. It should be there for those who need it and should not be an expensive luxury paid out to those who don’t need it. This is especially important when one considers the vast inter-generational disparities in wealth. When Generation Y hits retirement age after a lifetime of being barely able to afford to rent, let alone buy, a house and paying only measly amounts into DC pensions, there is going to be even more of a need for a safety net. A higher flat rate pension with some form of means-testing or tapering is an obvious solution.

  5. “What is more, they may well be drawing a pension for a quarter of a century or more. If their private pension income is frozen in cash terms, then decades of inflation will substantially erode its real value. This makes a generously indexed state pension all the more important if we are to avoid increased poverty among the “old elderly”. Those with a frozen state pension know all about erosion Mr Webb. To have the third lowest pension in the world (only Mexico and Chile are lower) frozen from the first payment or when one retires to a ‘wrong’ address is theft on a grand scale when they, the 4% who are victims of this, have paid their NI contributions under the same terms as everyone else. For a ‘rich’ country to do this to their own seniors is disgraceful and blatant discrimination. Shame on the UK government.

  6. Steve Webb says : “the politics of generous annual increases to the state pension seem pretty clear. But if we are interested in good pensions policy, what is the right approach going forward ?”
    Well, for a start the pension is paid to pensioners who qualify for the state pension by virtue of their contributions to the National Insurance Fund – right ?
    But , only so far because of the discrimination imposed by successive UK Governments as he should know. Why, well he was responsible for the inclusion of section 20 in the Pension Act that imposes a denial of any annual pension uprating to over half a million pensioners worldwide when he was Pension Minister having a catastrophic effect on the pensioners affected who live mostly in the Commonwealth countries.
    This policy was previously imposed by regulation 3 but section 20 superceeded that when the Pensions Act was introduced. This freezing policy was denounced by Steve Webb whilst in opposition in parliament but once in the perfect place, as Pensions Minister, to rectify this undemocratic and immoral policy he chose to change his mind to the detriment of those affected and no doubt had an effect on his losing his seat in parliament.
    As a result, this will affect all future emigrants to certain countries which is totally unacceptable denying a pensioner their rightful full pension rights because of their location because the pension belongs to the pensioner and not the government who are just responsible for the administration of it.
    He goes on to say that “The second problem with long-term price-indexation is that pensions are about helping you to maintain your standard of living in later life when you no longer have a wage. ”
    Something that he is responsible for taking away by the section 20 that he put in ?
    This bad situation affects a minority of all pensioners worldwide, about 4%, meaning that 96% all get treated fairly and properly while the rest are left to look poverty in the face and that is current British politics for you.

  7. Would it not be the sensible thing to only pay state pension to people with earnings of say £25k or less ?
    Surely anyone on decent earnings already eg. certain ex civil servants don’t really need it.
    Lets take care of the people who need it not the fat cats who don’t.

    • Andy Robertson-Fox 11th August 2016 at 9:10 am

      Don’t see how this would work as the majority of State Pensioners are non earners. Or are you suggestıng means testing their incomes in retirement?

  8. You can see from the quotes supplied by other contributors that the hypocracy of Steve Webb is unbelievable. In this article he tries to give the impression that he cares about the downtrodden British pensioner, who has contributed all their working life towards a lifelong indexed state pension, and that Triple Lock is the way to protect them.
    What has been pointed out by others here – and I’ll second them, is that Webb is a turncoat, a man who cannot be trusted, and a man whose word is not his bond.
    Everyone who paid National Insurance paid towards an indexed pension for themselves. No one told them they’d have to retire in a certain small group of countries to get it. No one told them if they chose the ‘wrong’ country to retire to (perhaps to join loved ones) that their hard-earned pension would be frozen with no increases for as long as they breathed.
    So why Steve Webb, all the phoney concern now? You showed concern once – as had been pointed out by others – but once in a position to do something about it, you changed course and followed the mandarins in the Treasury.
    A man’s principles are what he’s judged by, yours I’m afraid were left at the door of the Treasury, and then you walked away from them, and now you expect the people you deliberately destined for poverty (by freezing their pensions) to believe that you care now? As the saying goes, “Pigs will fly first”

  9. Next week’s state pensions are paid from this week’s taxes and NIC. To continue increasing the former at a faster rate than the latter simply isn’t sustainable. Mr Webb seems to be arguing that we should just sweep that uncomfortable reality under the carpet and carry on regardless.

    • Andy Robertson-Fox 11th August 2016 at 1:53 pm

      The payment of the State Retirement Pension is made from the NI Fund and not General Taxation. The NI Fund carrıes a recommended reserve of at least one sixth of its anticipated annual expenditure and currently has a surplus of over £23.8 billion.

  10. This is a debate in a vacuum. Contributors seem to forget (or not to know) that the UK pays the most parsimonious state pension in the whole of the OECD when measured against the percentage of national average earnings. Yes, there are the other points that Mr Webb points out (at last I am happy to find I’m in agreement with him!). However, mandatory benefits in UK, Japan, Germany and US fall short of the OECD average. Eligibility for the final year of full basic pension is around the OECD average, but at 16% of average earnings the current level of benefit is low in comparison to many countries, with the OECD average being equal to 20.5%. However, the value of the pension credit safety-net benefit is around the OECD average. But this doesnt say a lot when you consider that there are over 30 countries in the OECD and we have one of the latest retirement ages to boot.

    So all in all, even with current changes our State pension is pretty lousy and the Triple Lock is a way of improving things very slowly.

  11. Yes, Harry and you could add that the UK is the ONLY country in the OECD to discriminate against it’s pensioners – done by freezing a minority 4% because of their location as I mentioned earlier.

  12. Christine Brightwell 22nd August 2016 at 1:28 pm

    There are other ways to consider the importance of a sensible state pension. Those who fall into poverty tend to become sicker and unable to take care of themselves – they then become more of a burden upon the state. Perhaps not have proper support for our elders and in particular our old elderly is more expensive then we realise in other ways – not least in the loss of human dignity for those unable to cope.

    I strongly agree with SW (and Harry K above) that the triple lock must remain to slowly catch the state pension up with the growth in earnings over many years.

  13. With young people struggling to get on the housing ladder and the middle aged having to support elderly parents and young people the triple lock looks abjectly unfair. Pensioners also generally voted Brexit, which is a serious threat to government revenue. Many are also quite wealthy and the rest will have to claim benefits. That is the harsh reality in these uncertain times and triple lock is not a fair distribution any longer.

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