Britain’s Pension System: The Impact of Changing Demographics and the ‘Triple Lock’ on Retirement Income

From 8 April 2024, the first working day of the new tax year, United Kingdom pensioners will benefit from a controversial 8.5 per cent boost to the State Pension, more than double the rate of inflation (3.4 per cent) and worth up to an extra £900 of yearly income. This is the outcome of the government’s apparently politically-motivated decision to maintain the so-called ‘triple lock’ guarantee, whereby the State Pension increases each year by the highest of earnings (average percentage growth rate in wages in Great Britain), prices (percentage growth in prices in the UK as measured by the Consumer Prices Index), or a 2.5 per cent safety net. In this case, the State Pension has risen in line with wage increases. The triple lock was actually introduced by the Conservative government in 2011 to protect this pension against inflation. Despite many objections, it has been retained by successive Conservative governments, cognisant of its popularity with an older voter base that is more likely to vote Tory than otherwise. 

 Increasing longevity and declining fertility have increased the ratio of elderly people to those of working age, placing a greater burden on younger people to fund the later years of their parents and grandparents. As longevity continues to rise, as many as one in three babies born today may live to be a hundred. Those born between 1946 and 1964- Baby Boomers- have fared the best in today’s changing demographic landscape, having benefited from easier access to home ownership, rising property values, and gold-plated defined-benefit pension schemes, thereby increasing intergenerational income and wealth inequality in Britain. 

 The British pension system is made up of three “pillars.”  Retirement income can be drawn, in varying combinations, from a public pension, an employer -sponsored occupational or workplace pension, and individual retirement plans (stakeholder pensions, personal pension plans). Public pension provision consists of the State Pension system, backed up as required by means-tested Pension Credit to top up low-paid pensioners’ incomes to a guaranteed minimum level. The State Pension Age will increase to 67 between 2034 and to 68 between 2044 and 2046. People who reached the State Pension age (SPA) before 6 April 2016 are eligible for the Old Stage Pension, which is made up of a flat-rate Basic State Pension (BSP) and an earnings-related Additional State Pension, while those who reached their SPA after that 6 April 2016 receive a single-tier flat-rate New State Pension. The State Pension, subject to taxation, is paid out irrespective of income from other pensions. 

All components of this pension system, whether mandatory or voluntary, are facing increased fiscal pressures. As a consequence, occupational pensions have increasingly been moving away from index-linked, final-salary or average-salary, defined-benefit schemes, guaranteed by employers to provide a set pension income, to money-purchase, defined-contribution schemes, in which employees bear all of the risks of potentially volatile returns from the investment of pension assets in stocks and shares, but with more ready access to their pension pots ever since 2015. This move towards defined-contribution pensions has been particularly noticeable within the private sector.

 The state provision of retirement income dates back to the Old Age Pensions Act of 1908, which introduced a means-tested pension, funded from general taxation and restricted to those over the age of 70 and with an income less than £31.10 shillings a year. This was at a time when people worked for as long as they were physically capable of, lacking any reliable source of income when unemployed. The concept of voluntary withdrawal from employment while still able to work is a more recent feature, provided for by welfare arrangements in Western liberal democracies and elsewhere. 

 The State Pension is a major component of the welfare state that was put in place by the Labour government after the Second World War, in line with the recommendations of the 1942 Beveridge Report on Social Insurance and Allied Services. The Basic State Pension (BSP) was set up by the National Insurance Act of 1946, universal in scope, and financed on a pay-as-you-go (PAYGO) basis by National Insurance contributions paid by every employee and employer. Both contributions and benefits were paid at a flat rate. The Social Security Pensions Act 1975 established what became known as the State Earnings Related Pensions Scheme (SERPS), which became known as the Second State Pension after the Welfare and Pension Reforms Act 1999. The Second State Pension is now referred to as the Additional State Pension, available to lower-paid men born before 6 April 1951 or women born before 6 April 1953.  

According to a House of Commons research briefing by Rachael Hooker, dated 11 March 2022, the UK sets aside a smaller percentage of its GDP to state pensions and pensioner benefits when compared with most other advanced economies. The BSP thus provides a lower level of pension relative to average earnings, if one disregards retirement income from occupational and personal pensions. The full BSP currently provides £221.20 per week, requiring 35 years of qualifying National Insurance contributions to become eligible.  On its own, especially with a cost-of-living crisis, the BSP may not suffice for most pensioners, some of whom may also have not set aside sufficient retirement savings or may not have enrolled in supplementary pensions in a timely manner. 

Offsetting the risks of pensioner poverty against the undue fiscal demands of pensions on the younger generations is proving a challenge to public pension systems worldwide. The possibility of increasing taxes to fund growing pension demands, and the crowding out of other types of public spending in favour of pensions are thus concerning economists and politicians of all persuasions.  

The prospects of a retirement free from financial worries, in which a retiree is able to devote more of one’s twilight years to hobbies, travel, other forms of recreation, and creative activity appear to be retreating with a continued decline in savings for one’s old age, just as younger generations face longer years of work, job insecurity, labour market volatility, and the prospect of smaller and riskier pension pots. Better retirement planning, from an earlier age and facilitated by auto-enrolment workplace pension schemes, coupled with well-considered reforms to the public pension funding are thus important considerations for ageing societies such as in the UK.  

Ashis Banerjee