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No easy options in Theresa May’s pensions dilemma

The political rationale for the triple lock on pensions is obvious. Pensioners are much more likely to vote than younger generations. A state pension that always keeps pace with inflation and wages, and which outpaces both in a deflationary environment, is a slam dunk for politicians. Since older voters are generally more likely to vote Conservative - and in the last general election did so in huge numbers - it makes particular sense for Theresa May to think very carefully about keeping the triple lock.

Pensions already make up close to half of the Government's total social security expenditure - more than £100 billion.

That there is uncertainty at all about its future reflects the fiscal dimension to the triple lock. That is, its cost. The triple lock costs a lot of money. It has added £6bn a year to the Treasury’s pensions bill compared to what it would be if it had been only linked to wages. Pensions already make up close to half of the Government's total social security expenditure - more than £100 billion - and that does not include the cost of pensions tax relief which adds another £30 billion plus to the price tag. The amount spent on pensions and the importance of the grey vote is why politicians can’t resist making tweaks, whether they’re required or not.

The Treasury dislikes the triple lock intensely since it ensures, all other things being equal, that state pension costs will continue to rise faster over the long term than prices or wages. In the context of a rising old age dependency ratio the Treasury view becomes more vivid still.

Beyond the fiscal, there is a question about distribution i.e. the relative fairness of the triple lock. Pensioners have seen their incomes rise dramatically since the millennium both because of a rising state pension in real terms and their possession of defined benefit pensions. As such, the triple lock gives cast iron support to a generation that is already better off than its successors.

Pensioners now have higher average incomes than the population as a whole. This is a dramatic reversal of fortunes given that pensioners have been the age cohort most likely to be in poverty for the last 100 years. Since the financial crisis the UK's total wealth has risen by around £3 trillion. All of that new wealth has accrued to the over 40s with a plurality enjoyed by pensioners. Ownership of property and possession of a DB pension is the key to asset wealth and the young are locked out. Quantitative easing has exacerbated the divide by driving asset prices higher, benefitting owners of those assets at the expense of those who do not.

None of this is to suggest that all pensioners enjoy a high standard of living. Significant numbers of them rely on the state pension or pension credit for most or all of their income. Raising their incomes is very important. Our state pension is low by international standards as the Organisation for Economic Co-operation and Development (OECD) has repeatedly confirmed. This is in spite of the evidence that a generous state pension is the most effective way available of reducing pensioner poverty. The UK pension system does not rank highly in global league tables because of this perceived inadequacy in state pension provision.

So the task of British politicians must be to stop the runaway fiscal train of the triple lock. But to do so while ensuring that the state pension remains the bedrock of the UK system, aligned with the new workplace pensions programme of auto-enrolment. Auto-enrolment is designed to boost the retirement incomes in particular of those who enjoy lower incomes across their working lives. Decent pension provision is vital. But the triple lock is not vital to decent pension provision.

This article originally appeared in Financial News on 28 April 2017.





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