By Martin Heneghan, Assistant Professor of Social and Public Policy, University of Nottingham and Professor Liam Foster, University of Sheffield
This blog is the first from a new Pension Policy Group established by the Social Policy Association in late 2023. Here we discuss the main policy issues and challenges for the new Labour Government.
Keywords: Pensions, triple lock, auto-enrolment, state pension age
The 2024 General Election and Pensions
Unlike many issues in UK public policy, the main parties at the general election were clear on their policies for pensioners. This was unsurprising. Pensioners have a higher propensity to vote than the rest of the population. This means any political party hoping to win an election must think about pensioners’ interests carefully. It also involves significant expenditure; the state pension currently costs 4.9% of GDP. With an ageing population it remains a policy challenge to keep pension expenditure at a sustainable level whilst remaining adequate and fair. The previous governing Conservative Party had largely exempted pensioners from the austerity measures that affected other welfare recipients during their time in office, and they were shielded better than other groups – but not completely – from the recent period of high inflation in the UK economy. This was the result of a triple lock on pensions that ensures they increase by what is greater than the rise in prices, earnings or 2.5%. The elected Labour Party have also committed to maintain the triple lock.
The supposed privileged treatment of pensioners has led to claims of intergenerational unfairness. During the recent bout of inflation that saw the real value of wages fall for most workers, whilst the real value of incomes fell and mortgage rates increased for homeowners, some commentators warned of the risk of intergenerational conflict. However, in this blog we argue that the new government is right to maintain the triple lock and challenge the assertion it leads to intergenerational unfairness. In addition, we highlight further challenges ahead for the new Labour government in securing a fair, adequate and sustainable pension system.
The triple lock
Much of the protection for pensioners arose from an automatic adjustment measure introduced by the Conservative and Liberal Democrat coalition in 2010 called the ‘triple lock’. This ensures their pension rises by whatever is greater than the rise in prices, the rise in earnings or 2.5%. Over the years this has been framed as a cynical tool to buy the votes of pensioners at the cost of services for the rest of the population. However, the triple lock is a necessary measure given the UK state pension is amongst the least generous in the developed world. The UK has the lowest replacement rates of pre-retirement income in the OECD. In recent decades, pensioner income fell behind the rest of the population when uplifts were linked to prices. Index linking pensions to prices is important to ensure the value of pensions is not eroded by inflation. However, during the so-called ‘great moderation’ of the 1990s and 2000s as wages increased steadily and inflation fell significantly, pensioner income fell significantly behind full-time earnings. A low moment for linking pension uplifts to prices was in 2000 where, because of very low inflation, the state pension was increased by just 75p per week. At the time the triple lock was introduced, the level of the full Basic State Pension had fallen from 26% of full-time average earnings in 1979 to a low of 16% in 2008. It was against this backdrop that the triple lock was introduced, and it has been responsible for the recovery of pension income as a proportion of median earnings. At present, the full new state pension is worth 29.6% of median earnings. It should be noted that not all pensioners receive the full state pension as it tied to the number of years you have made national insurance contributions.
The Labour Party has confirmed it will keep the triple lock in place for the next parliament. Whereas the Conservatives went even further in there campaign and proposed a ‘Triple-lock plus’ scheme whereby the state pension will always be below the tax-free threshold for pensioners. Given the propensity to use ‘fiscal drag’ as a stealthy way to raise tax revenues where tax thresholds do not increase in line with inflation, the singling out of preferential treatment of pensioners has again fuelled claims of intergenerational unfairness during the election campaign. However, this would simply be reinstating a tax policy that existed prior.
With regards to the triple lock itself, it is likely to benefit the current workforce more than current pensioners. This is because when they come to retire the ratcheted increases each year from a longer period of time, will be baked into the pension they receive. It is important to consider this as part of a wider point on pension policy: today’s workers are tomorrow’s pensioners and therefore policies on pensions affect every generation, not just retirees.
Private pension provision
Given the relatively ungenerous state pension, private pensions have always been an important component of the UK’s pension landscape either as occupational pensions through people’s workplace or private savings. In 2023, around 70% of pensioners received part of their income from a private pension. The value of pension funds in the UK is over £1 trillion. Recently there has been a renewed interest how these funds can be steered towards meeting economic objectives in the UK economy. The Labour Party promised in its manifesto to increase investment from pension funds into UK markets, this builds on recent initiatives by the Conservative government to nudge the pension industry into domestic investment. The UK pension industry has a much lower propensity to invest in its domestic market than their international counterparts and a high propensity to buy government bonds. This could provide a longer time horizon for much-needed infrastructure investment. However, there has been some resistance from pension funds themselves who have stated ‘it is not their job to support levelling up. It is to build retirement funds’. Given the lack of high-growth firms on the UK stock market, a shift towards domestic investment could harm pensioner income in the future.
Private provision will grow in the coming years because of auto-enrolment. Since 2012, workers aged over 22 without an adequate workplace pension have been automatically enrolled into a low-cost portable occupational pension. As a result of this, 19.4 million people who had not previously saved into a pension scheme are now setting money aside for their retirement. However, too many are still excluded, and many of those in auto-enrolment are not saving enough. There is a need for the new government to mandate an increase in the minimum employer contribution from 3% to 6%. An increase of from 5% to 6% would see total contributions match those advocated by the Pensions and Lifetime Savings Association (PLSA). The present too-low savings rate, and a the low-interest environment that only recently ended point to the continued importance of the triple-lock on pensions because despite the UK’s huge pensions industry, millions will still be reliant on the state for most of their income in retirement for the medium-term at least. This is particularly the case for women. The wider inequalities in the labour market, and society more broadly, have a significant impact on the accumulation of pension savings for women.
The state pension age and lifetime allowance
If the triple-lock continues to rachet up the generosity of the state pension, which we have argued is desirable, then one way to ensure the pension system remains sustainable is to increase the state Pension Age (sPA). Recent history has seen a rise in the future sPA for both men and women. By 2020 the sPA for men and women was 66 but as recently as 2010, women could receive a state pension at the age of 60 and men at age 65. These changes were part of a series of measures designed to extend the duration of working life and reduce expenditure. Another increase in the sPA is timetabled for this parliament with a rise to 67 planned in 2028. Unsurprisingly, the new Labour government has yet to comment on this. Whilst rising longevity is argued to necessitate an increase in the state pension age, it should be noted that life expectancy varies by social class. The wealthier tend to live longer and therefore receive more from the state in retirement than the less wealthy. This points to inherent trade-offs between sustainability, generosity and overall fairness.
Another aspect of the pension system that benefits the wealthiest is the removal of the Lifetime Allowance (LTA), which capped the size a pension pot could reach before being taxed. Prior to being abolished in April this year by the Conservative government, the LTA was set at £1,073,100. The Labour Party had initially indicated they would reinstate the LTA but have since reneged on this commitment. This is largely due to the impact it had on senior medical staff who tended to leave the NHS before incurring a tax charge on their pension, but also the uncertainty of reintroducing it. The abolition of the LTA removes a progressive, tax raising measure for much-needed public investment and demonstrates that fiscal welfare is still a component of the UK’s welfare state – benefitting the wealthiest. The Labour government could consider reinstating the LTA at a higher level to be less distortionary to the labour market whilst raising much needed revenue from some of the wealthiest in society.
Conclusion
The Labour government will have to plan carefully to meet the triple challenge of achieving an adequate, sustainable and fair pension system. In this blog we have challenged a growing narrative that pensions should be the subject of spending restraint as part of an intergenerational conflict. We have also cautioned against seeing the pension system as a tool for economic development, whilst pension funds can play a large role in the domestic economy, their primary focus should always be building adequate retirement funds for their members. In a challenging fiscal environment the new government should reconsider blanket tax exemptions for the wealthiest pensioners.
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Dr Martin Heneghan is Assistant Professor in Social and Public Policy at the University of Nottingham. His most recent published research has been on the impact of Brexit on the UK’s service sector. Previous research was on the role of international organisations in shaping national pension policies and also on gendered pension inequalities. He is a member of the SPA Pension Policy Group.
Professor Liam Foster is a Professor in Social Policy at the University of Sheffield. He is currently part of a large ESRC funded project focusing on paid social care organising, and a Swedish Research Council Funded comparative project on inequalities in late working lives. He is a co-founder of the SPA Pension Policy Group.