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I thought it notable there wasn’t more pushback in the comments last weekend, when I cited a growing consensus that something must be done about the pension triple-lock.
A few of you raised thoughtful questions, mostly about what really drove the convergence of pension-age income with that of the rest of the population.
But there were no pitchforks, no curses. No shaking a fist at the unfairness of it all.
With hindsight, this eerie quiet further suggested that most of us can see the pension triple-lock is fair game – unsustainable in its current form.
And sure enough, on Tuesday the Prime Minister pulled the bandaid off.
The triple lock would be tweaked to reduce its long-run cost, Andy Burnham said, and any savings used to fund later life social care.
Triple-topped
As the BBC recaps:
The triple lock was introduced in 2010 by the coalition government and designed to ensure the value of the state pension was not overtaken by the increase in the cost of living or the incomes of working people.
It means the state pension rates rise every April by either inflation, earnings growth or 2.5% – whichever is the highest.
Burnham said this will stay in place until 2030, at which point he would like to “adjust it”.
He said: “The state pension will continue to rise every year at least by prices or 2.5%. And it will hold its value relative to earnings over time so that pensioners will always share in the rising prosperity of the nation.
But this change will generate significant savings which we will use to build up our national care service.
Some may not realise it but older people with nothing more than the state pension, or only a little more, can find themselves paying care charges today from that small income. Under my plan, this will no longer happen.”
On first blush it looks a sensible compromise. I think most people support a reasonable State Pension, if only because we’ll benefit from it ourselves.
But its ‘every way’s a winner’ ratchet made the old triple-lock system increasingly unviable. It’s already forecast to cost around three times as much by the end of the decade as originally expected.
Burnham’s tweak should reset the built-in escalation. According to the IFS:
The new, reformed version of the triple lock still contains three parts.
Inflation, earnings growth and 2.5% are all important.
But the new mechanism means that each year the state pension will instead increase by the maximum of:
- CPI inflation
- 2.5%
- the amount needed to ensure the state pension keeps up with average earnings growth since the introduction of the new policy.
Essentially Burnham is saying enough is enough on the catch-up we saw last week. The new tweak effectively cements the status quo, relative to average earnings, in the long run, while still providing protection against everyday inflation.
Here’s an illustrative scenario:
Source: IFS
Sense and sensibility
At first blush it looks like a good change to me.
The old mechanism was becoming too expensive. This new triple-lock will still protect the real value of the State Pension – and it will still be increasingly costly to fund. But the revised link with average earnings at least ties that cost implicitly to the taxes that will pay for it.
The tweak also seems like a pragmatic one – announced without bombast, a sensible timeline to delivery, and made in the face of some political risk.
Finally, funding social care for the elderly is a huge issue, as anyone who worked through my co-blogger’s deep dive a few years ago knows.
I don’t like the means-testy sounding way that Burnham is pitching his fresh look at the issue. Ideally I’d prefer some kind of paid-in insurance system that meant everyone would get to live in a care home for free in the end if they needed to. This would remove the lottery element to end-of-life planning, making it much easier to save (and spend) accordingly.
But at least it’s a real and weighty problem to tackle, unlike the phoney wars of the past decade.
Obviously it’s too early to declare that UK politics has returned to a reasonable centre ground. But might this too be a tweak in the right direction?
Have a great weekend!
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Exponential wealth: centuries of stock and bond returns – CFA Institute
Five things worth paying for – Dan Haylett
Stop obsessing about the safe withdrawal rate… – Use Your Wealth
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Aged Monevator reader here (now 80 as is wife)
From a longer perspective that some here it’s obvious that we are currently on an unsustainable financial path at the moment so……..
As a private sector worker all my life I never counted on State Pension for my retirement-it’s been a nice bonus that’s now coming to an end
(Taking SIPPs into the IHT rules also couldn’t be argued with -pensions are not a vehicle for wealth transfer)
U.K. State Pension is not excessive compared with other Western countries but is any of it sustainable
Tougher financial times ahead for all of us as the noose tightens !
xxd09
I certainly agree that the new tweak is a sensible step in the right direction. The most disappointing element for me is the retention of the 2.5% lock. I’ve never understood this one and would love to see it go. It’s just so arbitrary and there’s no possible logic behind it. If it were up to me I’d have it go up by the higher of either the amount needed to keep pace with inflation since the policy was implemented, or the amount needed to keep pace with earnings since the policy was implemented.
Completely agree with the comment from Weary Worker above. Where did the 2.5% element of the triple lock come from? Is there a significance to 2.5%, or is it just an arbitrary number?
The tweak is a reasonable one. Let’s not forget why the triple lock was introduced. The state pension had eroded to the point that they were 16% of average earnings and the lowest in Europe. Even now they are low compared to other developed Western countries. My experience is that everyone is better off now than several decades ago. Remember people driving rusty old heaps of a car? DIY keeping them going? Remember when foreign holidays or eating out were a luxury? Mum’s making clothes for their kids? etc etc.
Pensioners have no way to increase their incomes, they have no options. They’ve worked and paid taxes all their lives in order to qualify for their pension.
Yes the triple lock is unaffordable because successive governments have spent the money paid in to sustain them. Peoples standard of living has improved at the cost of services. How is education, armed forces, policing, roads, NHS, etc etc doing? Abysmally.
If there are any ‘patriots’ left, perhaps they should be happy to pay a bit more in tax to get the country back on its feet, and to sustain the triple lock.
Rant over, for now.
Considerable political risk with changes to pensions, I have advocated keeping the triple lock with a longer period of rolling averages to avoid the ratchet effect heads I win, tails you lose each year.
A while back I played with ChatGPT and came up with this , my favourite theory didn’t work out saving much !, a 5% cap each year helped.
Apologies for the formatting but the numbers are interesting.
By 2030, starting with £100 in 2011: to 2030 projected
Triple lock
£210.87
Compared to;
Five-year rolling averages
£204.71 (-2.9%)
Five-year rolling average with a 5% cap
£201.25 (-4.6%)
Earnings only
£183.25 (-13.1%)
CPI only
£174.11 (-17.4%)
Re: Weary Worker, Mirror Man
I think the 2.5% was just a simple way to have pensions gradually recover ground lost vs inflation and wages over the previous few decades. Given that Triple Lock V2.0 is explicitly NOT trying to ratchet up vs wages, it now seems redundant.
Is there really that much political risk with the pension triple lock ? I would get rid of the 2.5% element too. I think perceived unfairness is the key issue, particularly people gaming welfare, disability etc generally.
I’ve always assumed that the 2.5% increase was included to ensure that no government ever again suffers the flak received by Chancellor Gordon Brown in 1999/2000. This was at a time when the state pension increase was based on RPI inflation only. The September 1999 RPI increase, on which the April 2000 pension increase was based, had dipped to 1.1% with the result that the pension increase was only 75p/week.
Google AI, which confirmed the details of the basic facts for me, also suggests this was the reason for 2.5% being included in the triple lock.
I remember the outcry when state pension only went up by 75p per week one year. Looking it up that was back in April 2020. That was because inflation was only 1.1%. Of course it is logical to think a 3% increase when CPI is 3% is no different to a 1.1% increase when inflation is 1.1%, but in the real world people don’t think that way. I think that was the origin of an introduction of a minimum increase then £5pw, which turned into the 2.5% element of the triple lock.
The new weakened triple lock (the third element being the requirement to maintain its value against earnings over time) seems like a sensible move which works in the real world.
If we assume that the greater of CPI and 2.5% each year will produce lower increases than cumulative earnings increases over a long time, then it all works nicely.
We might start out with the first increases being CPI or 2.5%. And then cumulative earnings will later catch up the double lock and we get an extra uplift to take it up the cumulative earnings increase level. And then if we have a few more later years where CPI or 2.5% is higher than earnings it goes ahead of earnings again before it gets pulled back like gravity to cumulative earnings later in time.
So in each year the ‘my pension has gone up by less than x’ and ‘my pension hasn’t gone up enough by inflation’ brigade can’t complain, as the pension always goes up by the higher of CPI or 2.5% but at the same time increases eventually get pulled back to the cumulative earnings increase so the cost never gets out of control (at least if we ignore demographics of the increasing adult dependency ratio).
The key will be in the precise mechanism of how the protection of overall value against earnings underpin works, and the above assumes one version of this.
The triple lock has served a purpose of increasing the state pension as a proportion of earnings by 14% since 2011, and so bringing low income pensioners’ incomes to above poverty levels. But that uplift above earnings had to stop at some point for obvious economic reasons.
Interestingly had the state pension been increased from 2011 to 2027 by the greater of CPI and 2.5% each year (with no requirement to maintain its value against earnings) it would actually still have increased by 4% more than earnings over the period from 2011 to 2027. Over the whole period 2011 to 2017 earnings have increased relative to prices by only about 0.22% per annum which is historically very low. Perhaps 1.5% – 2% is a typical long term assumption for long term growth of earnings over prices. So the ratchet of a CPI/2.5% double lock didn’t need to do much lifting to push the increases above earnings from 2011 to 2027. Also 2011 to 2027 arguably includes an abnormal number of years where CPI has been below 2.5% (it’s the variation in CPI that pushes it below 2.5% in some year that is important for the new ratchet not really the absolute level of CPI). So I’m taking that as an anomalous period. That said these sort of ratchets are difficult to evaluate.
The national care service idea is dangerous I think, price caps cause supply shortages – like how you can’t see an NHS gp or dentist you could in the future struggle to get care – subsidised, but unavailable – like looking at empty shelves in an old soviet supermarket looking at the bargains you can’t have, demand is higher just as it’s not profitable to supply more
Private insurance, charging the true cost and paying out the true cost, as decided by markets, is the only way to not cramp supply, and it wouldn’t be popular to make that compulsory when the poorest don’t pay anyway and this policy effectively protects those with assets, at the expense of workers
@Paul_a38
“Is there really that much political risk with the pension triple lock ?”
Starmer couldn’t even cut winter fuel payments without enormous pushback, scrapping the triple lock makes that look minor.
I suspect part of the reason 2.5% is being kept is so it can still be called a ‘triple lock’.
There are so many questions to be answered about the proposed national social home care scheme, not least being whether the MIG, minimum income guarantee, that local councils use to assess the contribution to be made to costs will change. At the moment it stands at £184 per week for a couple, well below the £500 a pensioner couple can expect to receive as a pension. What does “free at the point of need” mean?
Further to my #8 comment, my Google AI search linked to this article by Steve Webb, who was of course involved in the design of the triple lock.
https://blogs.bath.ac.uk/iprblog/2020/10/20/in-defence-of-the-state-pension-triple-lock/
It confirms the April 2000 75p increase was behind the 2.5% element of the triple lock. He further adds in the article that the government awarded a £5 p.w. increase the following year, almost by way of penitence.
David V, you are correct. Papers made great play at the time about the miserly 78p increase. The same papers saying the triple lock has been abandoned and old people are hated by the Labour government. Whatever Labour proposed will be slammed by most of the papers.
Thanks for the ‘Stop obsessing about the safe withdrawal rate… – Use Your Wealth’ link. I enjoyed that, wise words.
Some interesting unstated assumptions in the chatter re the revised TL. Namely: wages will continue to increase, and inflation (as measured by CPI (Sept to Sept)) will ever be below 2.5%PA again. And only one person mentioned a cap. Lets see.
@Al Cam (16)
If the assumptions you cite don’t hold, the government will spend the political capital with no financial cost saving relative to the existing policy..
@al cam
We all tend to think within recent experience as guidelines, when in fact some surprisingly crazy stuff can happen…
@HS agree totally
@DV but that “spend” would probably be amongst the least of their then problems
Free care when you are old…. free, is always good but there may be ‘quality’ and ‘availability’ constraints.
Linking the cost of subsidising “Care” to cutting the State Retirement Pension is just the usual politics of obfuscation. In the unlikely event that Care does get a big subsidy it could come from cutting lots of different government subsidies – there’s no economic justification to linking it to cutting pensions.
Similarly, if there is an economic case for cutting pensions it has nothing to do with Care. Personally, without having checked the arithmetic, I advocate considering a double lock: pensions rise by the larger of (i) earnings growth, (ii) 0%. In other words, no cuts in nominal terms even if earnings growth turns negative. Presumably nobody can know whether that would prove “too expensive” since nobody knows what the future holds. But at least it would be simple and applied every year.
Burnham, however, seems to be expressing a fervent but vague wish that pensions match earnings as assessed at some unknown interval. One advantage of the Triple Lock was that when Rishi varied the terms one year, he did so explicitly and with an attempt at a justification.
Pensioners are a big voter group, no one wants the “this govt hates pensioners” headlines. Hence why Cameron/Clegg made the triple lock an uncapped fiscal timebomb, and the following PMs all dodged the problem, though everyone knew it’s unsustainable.
I think Burnham deserves A LOT of credit for addressing the triple lock and other thorny topics like social care and Brexit.
The “double lock” proposal, keeping the 2.5% lock is politically clever. “Double lock” sounds better, while the 2.5% minimum is worth nothing in an inflationary regime with rates way above 2.5%. Even if this trend turns, governments and central banks have strong incentives to keep pushing inflation above 3%.
I’m with Matthew on this one. A national social care service sounds lovely on paper, but it would be run by the same bureaucrats who turned the NHS into a very expensive black hole. We could end up feeding not one bottomless pit but two, sitting side by side like a pair of cuckoo chicks in the Treasury’s nest, beaks permanently open.
So I agree with TI that the practical side is still very much up in the air. Burnham’s version splits care in two. The personal stuff, help with eating, washing and the loo, becomes free based on need. Bed and board stays means-tested by the council, same as today. So the state will happily pay someone to help you into the bath, but the bath, the bed and the dinner are still on your tab. A bit like a hotel offering free room service and still charging for the room. And the money comes from trimming the triple lock after 2030, phased in as the savings trickle through, with Baroness Casey due to tell us how it actually works in summer 2027. For now it’s an IOU on very nice letterhead.
Nobody appears to have noticed that Burnham is essentially removing the “lock” nature with this vaguary around wages indexing. Besides, it’s for 2030; compared to other taxation that is going to come I can’t see it being the focus for long at the moment. I’m not sure why we are not referring to the various fiscally dragging fixed tax thresholds as also being “locked” schemes. It’s very odd.
As for “political” pushback, it’s interesting how much “political” power the media has, having not been elected in any democratic political manner at all. Does the pushback come from the people first or is the level of outrage determined by the media and then presented to the people? It is the latter, of course, as this is their power. Many elderly are easily manipulated by this lot, being in a state of fear most of the time. In my experience, most pensioners are reasonable. But that does not align with power by deceit.
When you allow a comfortable lie to persist over working lifetimes about how NI puts money aside, and isn’t just income tax by another name (which it is) don’t be surprised if the lie bites back at you.
“Use your Wealth “ on withdrawal rates resonated with me
Never been able to set exact parameters to de-accumulation as some investors obviously can or certainly make a serious attempt as others do
Life throws too many curveballs and black swan events for me
Over a 23 yrs retirement one very rough guideline has helped -the Trinity study of many years ago
Never went over 4% and aimed for nearer 3% -ended up averaging 3.5%
Now as I am in the end game not so concerned but very difficult to change the habits of a long retirement -running nearer 4% than 3%
Running Quicken 2004 as my only money management tool has been crucial-constant real information available at all times
Worked well -so far!
xxd09
On withdrawal strategies:
Withdrawal strategies from a risk portfolio fall into three broad functional categories
1) The income follows a pre-determined path with time but the longevity of the portfolio is unknown (e.g., constant dollar or SWR approach is the best known)
2) The income varies in proportion to the current portfolio value and the longevity of the portfolio is either planned for or, effectively, infinite (e.g., constant percentage of portfolio, various amortization strategies such as VPW, ABW, etc.).
3) A hybrid where the income is volatile (but less so than in Case 2) and the longevity is unknown (but is usually longer than Case 1). These broadly fall into two main categories, those that start with a variable approach and then constrain the income volatility (e.g., floor and ceiling, Vanguard dynamic, etc.) and those that start with constant income and which then allow some variation (e.g., Guyton-Klinger, Kitces ratchet – the SSRN paper cited in the article falls into this category too). A third (much smaller) category mixes both (e.g., Carlson’s endowment or a simple mix of constant dollar with variable withdrawals).
How much volatility in income a retiree can stand is somewhat dependent on how much of their expenditure is supported by sources of ‘guaranteed’ income (e.g., state pension, DB pension, RPI annuities, ILG ladders). A withdrawal strategy can then be selected on the basis of one that provides the desired compromise between income volatility and longevity.
Having implemented and backtested more than 20 strategies, my view is that looking for a ‘perfect’ withdrawal strategy is pointless. However, no doubt the search will continue!
FWIW, in practice, we are currently using two amortization type approaches – a variant of VPW and an approach that also includes our guaranteed income (e.g., https://www.bogleheads.org/forum/viewtopic.php?t=473403 is one such tool) as guidance, with the actual withdrawal usually falling somewhere between the two. Given that most of our income is derived from guaranteed sources, for us high volatility in portfolio withdrawals is acceptable.
@Gudwin (#23)
Spending on the NHS is broadly in line with other comparable countries (e.g., see Figure 6 in the report linked at https://www.kingsfund.org.uk/insight-and-analysis/reports/nhs-compare-health-care-systems-other-countries – while written 3 years ago, this is well worth a read) – in fact at 1.9%, spending on administration is lower than most comparator countries (Figure 19 in the linked report).
While the NHS is not perfect (particularly in staffing, equipment and beds), we could have it much worse and live in the US, where overall health spending is much higher and many of the outcomes much worse, e.g., pregnancy related deaths are about 3 times the average for developed countries).
On means testing the state pension, I have Australian friends who don’t seem unduly upset by the means testing. However they are still entitled to a variety of significant benefits ,including a home equity release scheme.
Re the withdrawal approaches , if it goes well then events can make worrying about it a non issue, until you reach that point it is of great concern !
@Hariseldon — Indeed, the devil is always in the detail when comparing these different pensions around the world. I’m always amazed by the size of US pensions as reported in FIRE blogs, but of course the whole US social security system is closely tied to earnings.
On the face of it that US system seems more sensible to me — you’d think it would at least encourage more universal buy-in — but they are always having the same arguments about long-run sustainability so I suppose not.
Perhaps the problem with our pension is it’s really a minimum safety net, but it’s perceived as a ‘due reward for a lifetime of hard work’. Those things are far from equivalent! 🙂
Just a quick thought, but pensions are not means tested so some people are getting them where its not essential. Covering care costs when required is, so this is probabably a more efficient way of spending the money.
@tom – it could be argued that pensions are means tested through income tax – the state pension takes up the personal allowance, and most of all private pension is taxed, expect the tax free lump sum
Most of what isn’t paid out in state pension would have to be paid in extra pension credit or gov supplementing care more, it’s just that this welfare is currently done more in the name of the state pension, without it we’d have the same outlay blamed on something else
@TheInvestor
On US pensions, father worked in US for 10 years ( tool & die, mostly in the 40’s 50’s popping back in the early 80’s to meet the 10 year requirement) and received about the same amount as his full UK state pension… in addition mother had a pension based on his earnings and subsequent widows pension, given they both lived to 99…. pensions are an expensive buisness.
In 2019, US retirement social security (i.e., equivalent to the state pension cost about 6.6% of GDP compared to 4.7% in the UK. The OECD average was 7.0%. Bear in mind that US retirees have significant outlays in health insurance (the largest single source of bankruptcy in that country?) that offset their more generous system.
One point about a flat rate pension (such as that in the UK) is that richer people will tend to receive it for longer than poorer people (e.g., some postcodes have life expectancies about 10 years below national average) which might at least partially make up for having it taxed.
@Alan S:
Re: “One point about a flat rate pension (such as that in the UK) is that richer people will tend to receive it for longer than poorer people (e.g., some postcodes have life expectancies about 10 years below national average) which might at least partially make up for having it taxed.”
Indeed, but then again they probably paid more for it too, and in that sense it is already means tested – i.e. the more means you have the more you pay in to get it
I’m not sure it is completely correct to refer to the UK state pension as flat rate. For 39 years (1977 to 2016) SERPS or S2P was in place providing an uplift to the basic state pension for those who had not contracted out. Anyone who paid full-rate NI at any time during these years potentially can, even retiring after 2016, receive a Protected Payment on top of their full New State Pension (as I do). Those who were contracted out pay later for their reduced NI contributions via a contracted-out deduction to the NSP. (This is supposed to be compensated for by the GMP in contracted-out occupational schemes or by the Appropriate Personal Pension used for contracting out.)
For full transparency I had an approximately 50:50 mixture of contracted-out and contracted-in years between 1977 and 2016 but on balance still came out on top with a PP uplift to my NSP.
It will take quite a few more years for these effects to shake out and for the NSP to be genuinely flat rate for those with an adequately full NI record.
@DavidV,
You are correct.
IIRC, there are relatively few with a PP uplift, and the overall number decreases each year too. I am sure we had some stats on this a wee while back (from the IFS perhaps) but I cannot remember where exactly they came from. Do you recall?
Also, IIRC, the PP is not linked to the triple lock and only increases by CPI.
@Al Cam (36)
I’m fairly sure you are correct that it was an IFS report that detailed the number of state pensioners receiving a PP and, on the other side of the distribution, those not receiving the full NSP. I thought I might have had a copy on my hard drive but failed to locate it. I remember being surprised that the numbers receiving a PP were not that large, especially as I only had a ~50% contracted-in period and did qualify for a PP.
You are definitely correct that the PP only increases by CPI and not the triple lock.
@Al Cam (36)
Here you are – it’s shown in the appendix of this report, Figure A.1:
https://ifs.org.uk/publications/future-state-pension
@DV,
Thats the one. Thanks.
This post led on the possible demise of the Triple Lock (TL). I have revealed in #35 that I receive a Protected Payment (PP) in addition to the full New State Pension (NSP) and Al Cam #36 has correctly pointed out that the PP escalates only by CPI. I thought it might be interesting to Monevator readers to show the difference the two escalation methods make after eight years.
I reached state pension age in December 2018 and qualified for a PP which was then 24.7% of the full NSP. As of 2026 the NSP, escalated by the TL, is 46.8% greater than in 2018. My PP, escalated by CPI, is in contrast only 33.8% greater than in 2018. My PP is currently 22.5% of the full NSP – down from 24.7%.
I must point out that under the old system, before the introduction of the NSP in 2016, my starting amount would have been the same – this time comprising the basic state pension and an Additional Pension (AP) earned through SERPS and S2P. However, I would be worse off now as only the basic state pension would have escalated by the TL, while the AP (larger than my PP) would have escalated by CPI.
@DV (#40):
Interesting. Especially the wrinkle of NSP & PP vs old basic state pension & AP. FWIW, I could not remember if AP was subject to the TL or not?
The IFS paper looked rather familiar, so I did a bit of digging. Turns out it was the one that we struggled with until we posited that it might contain an error. If you remember, the authors subsequently confirmed this. Funny old world.
@Al Cam (41)
When I was trying to track down the IFS paper I did wonder if it was the one where we found the error. However, I was focused on tracking down that Figure A.1 and after finding it did not explore further to confirm.
“US retirees have significant outlays in health insurance” true, even with Medicare.
“the largest single source of bankruptcy in that country?”: no that turned out to be bogus. The biggest problem turned out to be losing your job and being unable to find another one that paid as much. Of course once you opt for bankruptcy you throw in the kitchen sink – mortgage debt, medical debt, car debt …
The reformulation – max of CPI, 2.5%, or whatever’s needed to keep pace with earnings since 2010 – seems the most honest framing of a policy that had become a pure ratchet. What I haven’t seen discussed much is the interaction with NI: if the pension’s growth slows, the lifetime return on today’s employee NI contributions looks thinner, which makes voluntary Class 3 top-ups an even more obvious bargain for anyone with gaps. The care-funding earmarking feels like political packaging, but the underlying mechanism change is real.