The UK state pension is set to go up in line with inflation in 2022/23  without taking into account earnings, but a former pensions minister says MPs have been given misleading information over the choices available and wants to see a discretionary earnings link. So what are the facts about the UK state pension? 

 

The House of Lords is set to debate and vote on a modified triple lock on Tuesday, and Baroness Ros Altmann, a former Tory pensions minister, is looking to rally peers to vote against abandoning the triple lock altogether as proposed by the government.

 

 

By dropping the earnings link, the government seeks to avoid reflecting post-lockdown distortions in earnings, which shot up after lockdowns had been imposed. It will be the first time that state pensions do not increase in line with what has come to be known as the ‘triple lock’, a policy thought up by the Liberal Democrats and introduced by the coalition government in 2011, whereby state pensions increase by the highest of inflation, earnings or 2.5%. 

 

Altmann argued that a 3.1% increase in state pensions, in line with price increases in the 12 months to September, are a “real-terms cut” as inflation is expected to move up beyond 4% over the winter. Any increase in inflation this winter would be reflected in state pensions in 2023/24, however.

 

The change to the triple lock would save the Treasury about £5bn. Altmann said this money was being ‘taken away’ from pensioners. “Pensioners should not be used as a cash machine to pay for spending elsewhere, such as a lower bank levy or alcohol duty, especially as we face a cost of living crisis,” she said. 

 

She claimed that MPs were given misleading information over the choices available, which were presented as either going up by the 8.3% increase in earnings or no earnings link at all. Instead, the legislation allows the secretary of state to exercise discretion in deciding by how much state pensions should go up, which could include moderating the pandemic effect, she suggested and wants to see this applied. 

 

“The myth that all pensioners are well off is leading people to overlook the needs of the poorest – who any civilised society should not be shortchanging in order to fund other spending,” said Altmann. 
 

 

Pensioner poverty in the UK has been increasing before the pandemic. Despite this, pensioners are currently still the age group least likely to live in relative poverty, and have been since about 2003/04, while nearly a third of the UK’s children are poor, according to thinktank the Resolution Foundation, which based its research on DWP figures.  

 

Among those who struggle financially in later life, not all receive the help they are entitled to; charity Age UK found that 920,000 pensioner households are missing out on Pension Credit payments worth up to £1.6bn a year. 

 

 

A 3.1% state pension increase means the basic state pension would rise by £4.25, to £141.85 per week, while the new flat-rate state pension would go up by £5.55, to £185.15 a week. The UK state pension is one of the lowest in the OECD, replacing only about a quarter of the average wage, and the UK uses a smaller percentage of its GDP, 4.7% versus a 6.5% OECD average, for state pensions than most advanced economies. 

 

However, unlike the systems of many other countries, the UK pension system is more heavily reliant on occupational pensions. A UK government briefing from spring this year notes that a comparison of state pension alone shows the UK providing a lower level of pension than most other advanced economies relative to average earnings, but that “the relative position of pensioners converges if income from all sources is considered”.  

 

The UK state pension replaced 28.4% (net) of an average wage. Once workplace pensions are included, this rises to 61% net but either way, UK pensions are below the OECD average of 65.4% and the EU average of 67% based on 2018 figures. In comparison, the Dutch system replaces about 80% of net average incomes, Sweden about 53% and the Australian system 41%. 

 

While the UK requires a shorter working record – 35 years – than many other countries to claim a full state pension, this is now only paid at age 66, and is set to increase further to 67 and then 68. 

 

 

The view that a moderated earnings link should be applied has support from some in the industry. Over the spring and early summer, many pensions experts offered suggestions for a fairer approach than what the government has proposed, said Steven Cameron, pensions director at provider Aegon.  

“Rather than blindly follow the current formula, many suggested either smoothing out increases over a two or three-year period or alternatively basing the increase on an earnings growth figure calculated by the official statisticians with the pandemic distortions stripped out,” he said.  

  

While 8.3% continues to look extremely generous, 3.1% was now looking harsh against expected winter rises in the cost of living, he argued. “Baroness Altmann may yet persuade the government to look again at a fairer middle ground increase,” he said. 

 

Others are sceptical that such a proposal can find support. “Even though pensioners would like the 8%, even they – and most of the rest of the population – think it is an anomaly and a step too far,” said partner at law firm Pinsent Masons, Robin Ellison. 

  

He added that he does not see a future for the triple lock: “The triple lock was going to have to be phased out anyway at some stage, especially since pensions were rising faster than wages in the last few years. Politically it was unstable." 

 

Whether the triple lock will return and for how long is ultimately uncertain. Altmann herself previously said that it had become “totemic” and “was never a sensible long-term policy” but based this on her view that “the part of the triple lock which makes no sense is the 2.5%" rather than the earnings link which is now being abandoned.