The History of the Triple Lock

Briefing Paper September 2021

Introduction

When the Labour Government decided to raise the basic state pension in line with inflation in April 2000, they faced a huge backlash. A 1.1% increase based on the Retail Price Index (RPI) produced a 75p a week rise which was widely seen as both insulting and totally inadequate.

As a result of pressure from organisations like the NPC, in 2001 Chancellor Gordon Brown made a commitment to increase the Basic State Pension (BSP) by a minimum of 2.5% or prices, whichever was higher. When the Coalition Government came to power in 2010, they kept the 2.5% guarantee, added the earnings link, but changed the inflation link from RPI to the lower Consumer Price Index (CPI). These three elements of indexation became known as the “triple lock”.

However, with the prospect of earnings increasing above CPI inflation in the coming year the triple lock is coming under attack. To delete or significantly reduce this element of the triple lock would totally undermine the reason for its introduction.

Pensioners in the UK

It is important to understand what the current pensioner population looks like in terms of its income and financial security. A quick snapshot reveals the following:

The proportion of pensioners in relative and absolute low income (before housing costs) is 18% and 15% respectively. After housing costs this is 16% and 13% respectively. These figures equate to 2.1 million pensioners in relative low-income (before housing costs)

1.8 million pensioners under the absolute low-income measure of 60% median population income with 1.1 million pensioners living in severe poverty

Pensioners aged 85 and over have the highest rate of poverty among pensioners, at 22%. This has risen 6% since 2012

Poverty among older women appears to be rising at a slightly faster rate than among men, with a 4% rise of male pensioners living in poverty since 2012 (to 16%), and a 6% rise among female pensioners (to 20%).

42% of older people (4.8m) in the UK said they have struggled to afford essential items such as food, gas, electricity

3.8 million people aged 65+ (38 per cent) have had to stop certain activities, such as replacing or repairing electrical goods and having friends and family round for dinner, because they could not afford it

25% of pensioner households do not have any savings

Of the 11.93m pensioners in Britain, around 545,000 pay tax at the higher rate. Of the remaining 11.385 million, approximately half pay tax at the 20% and the remaining 5.5m have an income below £12,500 and do not pay any income tax at all.

How generous is the triple lock?

Much of the current argument surrounding the triple lock is based on the claim that it is too generous and financially unaffordable. Table 1 shows exactly how over the last ten years the State Pension (SP), both Basic State Pension (BSP) and New State Pension (NSP) introduced from 2016, has been increased since the triple lock was introduced. Prior to that, the SP rose by the greater of RPI or 2.5%.

Table 1: A look at how the triple lock mechanism has worked over the last decade

Year

Rate of Indexation

Mechanism for the increase

2012

5.2%

CPI (lower than RPI that year)

2013

2.5%

Guaranteed minimum

2014

2.7%

CPI (lower than RPI that year)

2015

2.5%

Guaranteed minimum

2016

2.9%

Average Earnings

2017

2.5%

Guaranteed minimum

2018

3.0%

Inflation

2019

2.6%

Average Earnings

2020

3.9%

Average Earnings

2021

2.5%

Guaranteed minimum

In the first year of the triple lock the BSP rose in line with CPI – but that was lower than pensioners would have received under the system prior to the triple lock being introduced. In the second year, it rose in line with the 2.5% minimum – just as it would have done prior to the triple lock. In the third year, it again rose by CPI – which again was lower than the RPI figure that pensioners would have received previously. In the fourth year the BSP went up again by the 2.5% minimum and in year five, it rose by average earnings. It has only done this three times in the lifespan of the triple lock that it has given a higher award than pensioners would have received anyway under the system that had been in place since 2001. For 2021, the BSP & NSP rose only by the 2.5% guaranteed minimum

Indexation

The argument that the triple lock is therefore either too generous or unaffordable simply isn’t supported by the facts. On two occasions pensioners got less than they would have done under the pre-triple lock system, on four occasions they got exactly the same.

These figures also ignore the very real reduction in value that the BSP suffered when the link with earnings was broken by the Conservative government in 1980. In 2010, when the triple lock was introduced, the BSP would have stood at £161.30 a week had the earnings’ link still been in place, compared to the actual figure of £97.65. In 2021 that figure would now be £201.00 a week rather than the current BSP of £137.60.

This loss since the break with earnings, including when the triple lock was in place, has never been recouped. Critics therefore have to argue that pensioners have done better out of the triple lock than younger people at work because the state pension has risen faster than average earnings.

Have pensions gone up more than earnings?

Tables 2 and 3 show the actual growth that has taken place in the BSP, NSP and average earnings since 2001 and 2016 respectively. They reveal that over the last 20 years, whilst the BSP has risen by 89.79% compared to average wages for full-time work of 71.99% – the actual gap between the BSP and earnings has widened. As a result, average wages now stand at £29,692 compared with a BSP of just £7,155.20.

Using percentage increases often paint a misleading picture of how much money people actually receive, and most people would accept that even 10% of very little is still very little. It is true that the percentage increase in the BSP in the last 20 years has been higher, but when looking at the last 5 years from 2016-2021, the percentage increase of BSP (15.34) and the NSP (15.39%) is very close to the Average Weekly

Earnings (15.79%).

Using percentages to compare increases in the State Pension with those of average earnings doesn’t show the actual picture of people’s incomes. For example, the BSP is £22,536.80 less than average earnings, and the NSP is £20,352.80 less. A 10% increase on £7155.20 is £715.52 and less than a 2.5% increase on £29,692.00, which works out at £742.30.

Additional State Pensions (ASP)

The comparison between the BSP and NSP is a tricky one due to the Additional State Pension (ASP). If you were paying into the ASP from 1978 to 2002, it was called State Earnings-Related Pension Scheme (SERPS). If you were paying in after 2002, it was called the State Second Pension (S2P). State Pension Top Up (SPTU) was a scheme in place between 12 October 2015 and 5 April 2017. It allowed men aged 65 or older and women aged 63 or older a chance to buy additional State Pension of up to £25 a week, a total of up to £1,300 a year.

The maximum ASP you can get in 2021-22 is £180.31 a week (not including state pension top-up). The majority of ASP holders do not receive anywhere near this amount, with the average ASP payment being just £15.76.

Additionally, some people receive Graduated Retirement Benefit (GRB) which was an early form of earnings-related pension, intended to top-up basic pension. It is based on graduated contributions paid on earnings between 1961 and 1975. Under the current rules only the BSP is linked to the triple lock whilst any state second pension such as SERPS, S2P or GRB is tied to the CPI.

Contracting out

The government previously allowed pension savers to ‘contract out’ of the additional state pension. The deal was quite simple – you paid less National Insurance (or contributions were diverted) and therefore you didn’t get the Additional State Pension, or it was reduced, and the money you saved in National Insurance was put into your workplace or private pension. In essence you got a similar amount of pension but from a different source. How contracting out worked depended on what kind of pension scheme you were saving into.

Contracting out ended in April 2016, but your contracting-out history will still impact how much state pension you get under both the old and the new system. The Office of National Statistics calculated 3.7 million were still contracted out. Which means many no longer have enough NI contributions to qualify for the full NSP even if they have worked for 35 years or more – the qualifying period for receiving the full state pension.

Table 2: Growth comparison between the maximum BSP, average BSP + ASP and maximum NSP and Full-Time Average Earnings

Weekly Amount 2001

Weekly Amount 2016

Weekly Amount 2021

Increase

in

£

Percentage Increase

%

2021 Annual Amount

Maximum

BSP

£72.50

£119.30

£137.60

£65.10 (2001)

£18.30 (2016)

89.79% (2001)

15.34% (2016)

£7,155.20

Maximum ASP

£180.31

£9376.12

Maximum BSP + ASP

£317.91

£16531.32

Average

BSP + ASP

£153.36

£7974.72

Maximum NSP

£155.65

£179.60

£23.95

(15.39% 2016)

£9,339.20

Average Earnings

£332.00

£493.33

£571.00

£239.00(2001)

£77.67 (2016)

71.99% (2001)

15.74% (2016)

£29,692

*2021 average weekly earnings predicted by ONS.

Table 3 shows that since 2001, the BSP has increased as a proportion of full-time average earnings from 21.84% to 24.09% – an increase of just 2.25% in 20 years. This could be due to a slump in wage growth over that period, a higher increase in state pensions or a combination of the two. However, more important is the fact that over the last 20 years, the gap between the BSP and average earnings has widened by £173.90 a week. In the last 5 years that figure stands at £59.37 for the BSP and £53.72 for the NSP. Any suggestion that state pensions have therefore risen by more than average earnings in real terms is simply incorrect. If anything, the BSP and NSP are falling behind, and the 2021 figures have shown a small decrease as a percentage of earnings between 2016 and 2021.

Table 3: BSP, BSP + ASP, and NSP as a % of Average Weekly Earnings (AWE) and monetary gap between BSP, BSP + ASP, NSP and AWE.

2001

2016

2021

BSP as a % of AWE

21.84%

24.18%

24.09%

Gap between BSP and AWE

£259.50

£374.03

£433.40

Average BSP + ASP as a % of AWE

26.86%

Gap between average BSP + ASP and AWE

£417.64

NSP as a % of AWE

31.55%

31.45%

Gap between NSP and AWE

£337.68

£391.40

Women’s Pensions Inequality

Women workers clearly suffer from generally having lower wages (and therefore

lower pension contributions), due to breaks in National Insurance or private pension contributions due to caring responsibilities/maternity leave or / insecure/ part-time employment. The reality is that if you are low paid – you will have a poor pension in retirement.

Married women were the poorest in terms of personal income and previously married women were twice as likely as similar men to be on means-tested Pension Credit. The gender pension gap, which stands at a shameful 40.3%—more than double the gender pay gap of 17.3%

One of the aims of the new state pension was to improve the position of those historically denied access to the additional state pension, notably women and those in low-paid jobs. However, many women have had their state pension age raised and they can also no longer inherit state pension based on their husband’s National Insurance contributions when you claim your own pension.

In additional to this the Government has recently announced up to £3billion total, repayment to thousands of women and some men who were underpaid their state pensions. Which? estimates it will take 6 years to repay all those affected.

The majority of those affected will receive an automatic backdated payment which could be in the £1,000s (the average payment will be £13,500 but could be potentially far more) but others will need to make a claim and will need to check their pension entitlement. Those who are due an automatic payment should receive a letter but due to the complexity of the cases some may not, and others may just slip through the net.

Inter-generational Fairness

Those against the triple lock argue that it is unfair on younger workers who are seeing state pensions rise faster than their own wages. However, the pay-as-you-go National Insurance system that funds the state pension is based on today’s workers paying for today’s pensions, just as today’s pensioners did when they were at work. This is a principle of generational solidarity rather than unfairness.

Nevertheless, it is worth highlighting that the triple lock is actually unfair to those who retired before April 2016, because under the current rules only the BSP is linked to the triple lock whilst any state second pension such as SERPS, S2P or GRB is tied to the CPI. In 2016, this meant the state second pension did not rise at all. By contrast, all of the new state pension that came into force in April 2016 is linked to the triple lock. This means that in April 2021 older pensioners will get a 2.5% increase to £137.60 a week, whilst newer pensioners will get a 2.5% increase to £179.60 a week. As a result, over time the gap between the old and new state pensions will widen. Additionally, the level of Pension Credit was set 5p below the NSP, and therefore no-one on the NSP would be able to claim Pension Credit and its associated entitlements.

Comparison of the New State Pension, Old State Pension & Pension Credit levels. In £ per week.

How much state pension are people getting?

Figures from the Department for Work and Pensions now show how much people are getting under the new state pension compared to the old system. The average pay-out of BSP + ASP is £153.36 whereas the average pay-out under the NSP is £164.10. The average NSP pay-out for men is £166.22, around £3 less per week than under the old system and for women the average NSP pay-out is £159.26 around £18 more a week than under the old system.

Generally better off under NSP

Women, carers, and the low paid who haven’t built up additional state pension self-employed, people who didn’t qualify for state second pension people who were contracted out and can access their private pensions at age 55, workers contracted out who have time to build up years of full NI contributions.

Generally worse off, or no better off under NSP

People with less than 10 years of NI qualifying years’, people with more than 35 years’ worth of full NI contributions, high earners who won’t be able to build up more Additional State Pension (ASP), younger employees who will no longer be able to build up ASP, spouses, civil partners, widows, and widowers who will no longer be able to claim or inherit a state pension based on a partner’s NI contributions those already drawing the state pension won’t be affected.

Will future generations need a decent state pension?

Critics of the triple lock such as former Work and Pensions Secretary of State, Stephen Crabb have started to argue that the triple lock should be replaced with a system whereby the State Pension would be linked to earnings but would have a temporary link to inflation if it exceeded wage growth. In effect it would introduce a rather complicated double lock that ensured the state pension would never rise higher relative to earnings, or by itself exceed the official poverty level. Andrew Hood of the IFS stated that this would allow pensioners to “have their cake and eat it”.

However, it is unlikely that future generations of pensioners will see it this way. A recent National Audit Office report found that 76% of people reaching retirement in 2060 will be worse off under the new state pension than if they had been on the old system. Millions of future pensioners are also likely to have less generous defined contribution occupational pensions and a rising State Pension Age of 68 and beyond.

The importance of a decent living state pension will therefore be even more important for this generation than for their parents and grandparents but reducing it by removing the triple lock will make this almost impossible to achieve.

Future governments will also need to consider whether or not they are prepared to support a system that might produce a repeat of the 75p incident that forced a change to indexation back in 2001. A return to a style of indexation that does not offer a meaningful, minimum guarantee will inevitably see a decline over time in the value of the state pension, just as was the case after 1980 when the link with earnings was broken.

That’s why all generations need a universal state pension set at 70% of the living wage (around £232.75 a week in 2021) which rises every year in line with the higher of wages, inflation (RPI and CPI) or 2.5%. This is the NPC’s campaign.

Key arguments

Even with the triple lock and the 2.5% guarantee, the BSP has still not recovered the losses suffered as a result of breaking the link with earnings in 1980.

The NPC will campaign for a universal state pension set at 70% of the living wage which rises every year in line with the higher of wages, inflation (RPI and CPI) or 2.5%.

Until we reach that aim, we will campaign for the highest monetary increase to be applied across both state pensions (BSP and NSP) irrespective of contributions, in order to equalise state pension disparity. For example, a 2.5% increase was awarded in 2021, the actual amount went from £175.20 a week to £179.60 a week, and this equates to a £4.40 for someone on the NSP with full contributions. The NPC believes that this amount, £4.40, should be applied to all state pension increases, meaning that someone who received £90.00 a week would now receive £94.40 a week.

As a result of the break with earnings, the UK State Pension and other pensioner entitlement remains the lowest and the least adequate in the economically developed world according to the OECD.

The triple lock has only given an increase in the State Pension that was higher than pensioners would have received anyway under the system that was in place since 2001, on just one occasion.

Using percentages to compare increases in the State Pension with those of average earnings doesn’t show the actual picture of people’s incomes. For example, the BSP is £22,536.80 less than average earnings, and the NSP is £20,352.80. For example, a 10% increase on £7155.20 is £715.52 and less than a 2.5% increase on £29,692.00, which works out at £742.30

Future generations are going to be even more reliant on the state pension in their retirement than their parents and grandparents. Scrapping the triple lock won’t help younger people; it will make their pensions worse in the future.

Sources: DWP, IFS, NAO, ONS, Which?, Independent Age, Hansard and NPC calculations.

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