From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    Dropping the earnings link for state pensions sets a dangerous precedent

    Dropping the earnings link for state pensions sets a dangerous precedent

    • Pensioners are not all well-off, millions rely on the State Pension which is the lowest in the developed world.   
    • Removing the earnings link sets a dangerous precedent that pensioners are a target for cost savings.   
    • Basic state pension was worth 26% of average earnings in 1979, fell to 16.3% by 2010 and is now 19% with new State Pension at 24.8%.   
    • A comprehensive review of pensioner support is needed, not short-term sudden changes in their protection.  

    It is disappointing to read that the Chancellor plans to abandon the triple lock protection for state pensions and remove the promised protection in relation to average earnings. The triple lock itself is a political construct, but, since 2016, it has become even less effective because it protects the youngest pensioners most and only applies to the old basic state pension, not the other earnings-related parts of the old system such as SERPS and S2P.  The element that is most redundant is the 2.5% minimum promise, even if earnings and prices rise by less and yet this seems to be what the Chancellor is considering applying to next year’s pension uprating.  I would urge him to think again.


    The UK State Pension has long been used as a political football:  Different Governments have announced rises or cuts in the levels of protection offered to future pensioners over the years. Before 1979, the basic state pension was required to rise in line with the highest of earnings or price inflation (a double lock), and in that year, the basic state pension was worth 26% of average earnings.  In 1979, politicians decided that basic state pension would only rise in line with price inflation, removing the earnings link at a time when earnings were rising much faster. In 2001 there was a political backlash after the furore about a very low state pension increase. So the Government promised it would uprate by at least 2.5% even if inflation was lower than this and introduced Pension Credit for the poorest. However, this still left the State Pension whittling away relative to earnings and by 2010 it was worth just 16.3% of the average earnings level.


    Even after years of the triple lock, the state pension is still lower than in 1979 relative to earnings: In 2010, the Coalition Government decided that pension benefits had fallen too far behind other benefits and, with many pensioners living in poverty, it introduced the ‘triple lock’ guarantee to increase state pensions by the best of prices, earnings or 2.5%. Since 2010, the basic state pension has recovered somewhat, but is still only worth 19% of average earnings, while the new State Pension is worth 24.8% (i.e. both still below the 1979 level).


    State Pension as a percentage of Net Average Earnings (Source: Pensions Policy Institute)

    1979                                                       26.0%

    2010                                                       16.3%

    2020                                                       19%        (New State Pension 24.8%)


    It is important that we do not keep using pensions as a political target to raid. Stability and protection are so important for our older generations. The triple lock had already outlived its usefulness by 2016 as it was applied to the full new State Pension while only the old basic State Pension was triple-locked, with the other elements tied to prices.  So it did need to be reconsidered, but that should take place with careful consideration and perhaps reverting to a double lock, but the 2.5% is an arbitrary figure which is difficult to justify on economic or social grounds. 


    Abandoning the earnings link sets a dangerous precedent: It sets a dangerous precedent for the Chancellor to abandon the earnings link (which is the legally required uprating for Pension Credit for the poorest pensioners).  The nation has a hugely divided pensioner population.  Some may be very well-off, but millions are not and the State Pension is less than a quarter of average earnings. The oldest pensioners tend to be the poorest and the majority of these are women.


    With the lowest and most complex state pension in the developed world, our pensioners need proper protection: The UK pays the lowest state pension in the developed world. The system is extremely complicated, comprising many different elements. There are many parts to the old state pension, and there are tax-free benefits such as Winter Fuel Payments, free travel, free eye tests, Christmas bonus, and so on. These tax-free elements are worth far more to wealthy pensioners than to the poorest.  These separate parts still cost significant sums and perhaps could be rolled into a better state pension, without the add-ons. 


    A considered careful review of pensioner support is needed, not frequent short-term changes: There is a need for a comprehensive review of all aspects of state support for pensioners, but this should be done in a thoughtful and considered manner, rather than as a knee-jerk reaction to one year’s numbers.

    9 thoughts on “Dropping the earnings link for state pensions sets a dangerous precedent

    1. And 150,000 pensioners in FAS don’t get a penny on the majority of their pensions which was earned pre 1997 which all governments of any parties have refused to increase, a total disgrace and here we are again stripping value from the level of society that can least afford it as most of them are below the poverty level

    2. Nothing changes on Planet Westminster, successive U.K. Governments have a total lack of respect for pensioners, take the former ASW steelworkers and those innocent victims in the FAS, they tell their pensions are safe, then rob them of 50%
      or more. Shameless to the core

    3. Yes , totally agree Ros, BUT

      Average DB Scheme Pension is just under £10k p.a.

      Current Old Basic State Pension £7.5kp.a.

      Pensioner Poverty Threshold £15kp.a. IFS

      Just there!

      But ,
      For around 76,000 currently in Financial Assistance Scheme, the Average Pension is only £3k p.a.

      Due to
      No pre 97 indexation since 2005, Cap on pension, Only 90 % of Original Scheme Benefits, No GMP indexation or GMP Revaluation, etc

      So these on FAS Average are £4.5k under the Poverty Threshold!

      But this and previous Minister refuse to even talk!

      And it’s still these Pensioners own funds, from Insolvent Schemes, NOT Taxpayers Money.

      Current Government don’t care in general, just cite the law, NOT Justice or Decency.

    4. MPs should give up their bloated salaries and try and live on the current state pension for a year. The UK position on state pensions is a disgrace to this once proud nation.
      they should bring it into line with the best developed nations we are a rich country we must treat our elderly much better . We should not abandon the triple lock if anything we should make the minimum rise 4% /yr not 2.5%.

    5. The MP ‘s would struggle to live in £179.60 per week. I would love to see an itemized weekly spend. A true one, wine, dinners out etc.

    6. Thanks Ros Altmann, very interesting read. Have you shown these figures to Rishi Sunak and Boris Johnson?
      Other countries really respect their elders, reflected in their pension schemes. After a lifetime of paying into the NI Fund surely the Treasury needs to return to their previous Supplement rather than the annual grant paid in at the discretion of of the Secretary of State.

    7. As a woman born in the 1950s I have already lost 6 years of my state pension which I paid in for from the age of 17. This government now calls the State Pension a benefit, which it is not. We pay in to collect the pension owed to us in our later life. And now to attack the triple lock? The government is seeing pensioners as a soft target and I for one am very angry. They are breaking the contract made and if they were a private company would be named and shamed for such callous behaviour and disregard of their citizens.

    8. Here we go again.
      last month I received my first monthly state pension. As a 1950’s woman I was robbed of 6 years payable pension and as I retired before my 66th birthday no one told me I still had to pay NI up until my 66th Birthday, Hence I receive a reduced pension.
      They should hang their heads in shame at what they have done/are going to do to the pensioners. It’s like every time they need to save money the poor pensioners are first in the queue to be hit. Supposedly all the educated people in parliament make very unwise decisions at our cost. When will it stop. I bet they have Harrods biscuits with their cuppas paid by the pensioners

    9. In the interest of fairness in reporting, Ros should be in a good position to remind everyone that those public service pensioners contracted out of SERPS 1978-2003, have deductions (COD) from their state pensions ….mine has been £46 per week, from 2009; (£2392 pa) That net state pension income when combined with the public service pension itself, (received via the PAYE payroll system), means the resultant lowered tax threshold determines that 20% tax on the state pension element above that lowered tax threshold is also deducted. (app £2230 p.a) But who will fairly report that in the forthcoming struggle about state pension review outcomes.

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