From the TUC

State pensions will be cut by the budget

25 Jun 2010, by in Pensions & Investment

Update: The calculations in the original post below contained a mistake.  I do self-criticism and update the figures here.

Original post (now superceded)

The state pension will be up to £1.30 lower under the Government’s new triple lock pensions system in 2012 and 2013 than it would have been under the old formula because of the switch from RPI to CPI for measuring the increase in the cost of living. And by 2015 the average state second pension will be more than £2 a week lower.

Before this week’s Budget the state pension was linked to increases in the cost of living calculated on the RPI measure of inflation. The Budget introduced a new and apparently more generous system that ties uprating of the state retirement pension in future to the higher of the increase in earnings, the increase in the cost of living or 2.5 per cent whichever is more generous. This is undoubtedly progressive.

But while the link to RPI will be kept for this year’s pension increase, after that the cost of living will be measured by CPI, which in most years is less than RPI. That is a very nasty sting in the tail.

Treasury figures suggest that after 2011 the pension will be lower than it would have been under the old RPI only system. As the table shows, the pension in 2012 is predicted to be £102.70 on the new system, while it would be £104 on the old system. The figure in bold is the indexing figure used in the new system. In 2013 the link to earnings is greater than either RPI or CPI. It thus helps the pension recovers some lost ground, but not enough top catch up the RPI only figure.

  Earnings(Treasury forecast) RPI (Treasury forecast) CPI (Treasury forecast) Single pension
uprated by new triple lock
Single pension uprated by RPI only
        £97.65 £97.65
2011 1.9 3.2 2.4 £100.77 £100.77
2012 2.3 3.2 1.9 £102.69 £104.00
2013 3.8 3.3 2.0 £106.59 £107.43

In the past earnings have outstripped prices over time (if not every year), and over a longer time frame the triple lock may well turn out better than a simple RPI link, but if we have a lost decade where the economy fails to grow much, who knows what will happen.

But of course few pensioners depend on the basic state pension alone. The state second pension and means-tested pensioner benefits will only be linked to CPI in future, and are thus likely to lose value.

State second pension (perhaps better known as SERPS – its old name – though now called S2P by jargon lovers) is the least understood bit of the pensions system. SERPS was originally introduced in the 1960s by Barbara Castle as an earnings related occupational pension for workers whose employers did not provide one. 

This was when occupational pension coverage was at its peak and covered a majority of the workforce. Most (though not all) defined benefit occupational schemes have always opted out of SERPS/S2P so people with decent occupational pensions are unlikely to get much or any S2P.

Since the 1960s it has evolved. The Conservatives cut its value back, and allowed individuals to opt out giving them a chance to be mis-sold a private pension instead. Labour turned it into a flat-rate pension designed to help lower-earners. 

But many current pensioners do get an earnings related pension as they paid SERPS contributions. Yvette Cooper says in a press release that:

  • 10.2 million people get the state second pension, including 6.1 million women. The average state second pension is £36 a week (ONS Pension trends Chapter 5, House of Commons Library)
  • The Budget announced that the additional state pension will in future be increased by CPI rather than RPI. This means that by 2015 the state second pension will on average be £2.20 a week and £114 a year lower. (Source: Red Book page 34, para 1.107, House of Commons Library.)

3 Responses to State pensions will be cut by the budget

  1. State pension increases – we got our sums wrong | ToUChstone blog: A public policy blog from the TUC
    Jun 29th 2010, 2:48 pm

    […] Last Saturday I had a post called state pensions will be cut by the budget. […]

  2. Peter Kemp
    Jul 1st 2010, 7:42 am

    You have clearly stated that the State Pension will be increased under the recent Budget to by either two and a half percent or according to CPI whichever is the greater.
    You have said also that Serps will be increased by the CPI rate but you have not clarified either way that it will be two and a half percent or CPI whichever is the greater.
    It would be appreciated just to settle any doubt please rather than leave a nagging doubt. Thank you.

  3. Nigel Stanley

    Nigel Stanley
    Jul 1st 2010, 11:19 pm

    There is no new guarantee for SERPS and S2P.

    See here for some comment on that.

    The triple lock on the SRP is welcome, but the new earnings link will make no difference for at least a few years. In the meantime pensioners have to pay the extra VAT, and do not get a boost to their tax allowance. Many will be hit by the cuts to housing benefit too.

    We do not yet know what will happen to Pensions Credit other than that it will go up by the same cash amount as the state retirement pension next year.

    This is very important for poorer pensioners, but the budget said nothing beyond next year.

    But I don’t think it would be right to say that pensioners were the biggest losers from the budget. The link to CPI for other benefits will be very bad news for many people. So lots of people will suffer.