While the “triple lock” annually uprating the State Pension might not currently figure large in your plans to fund your retirement, new figures show that millions of people could face disappointment, or even financial hardship, without it in the future…

Of all the political “hot potatoes” currently being juggled by the political parties, few are as controversial and divisive as the State Pension “triple lock” – introduced by the 2010 Coalition Government to help bridge the financial gap between those receiving the State Pension and the working population.

Some 15 years later, its apparent “generosity” is coming under increasing criticism from multiple sources, arguing that – as the numbers of State Pensioners continue to increase – its cost to the nation will soon be unaffordable.

Critics also argue that today’s workers funding the annual increases also amounts to intergenerational unfairness.

But new evidence suggests that, if the triple lock is scrapped, the biggest losers in the longer term would be today’s workers… because many will be heavily reliant on the State Pension in years to come.

Even higher earners could be affected if one of the more radical proposals currently being aired – for the State Pension to be means tested – come to pass.

“Under-saving” concerns

Why might it be so important in the future? A Freedom of Information request by LCP partner Steve Webb, the former Pensions Minister who was in office when the triple lock and auto enrolment was introduced, has unearthed previously unpublished DWP estimates of the scale of under-saving for retirement in the UK.

These DWP figures suggest that around 14.6m people are currently facing a sharp drop in their standard of living when they stop work. However, these figures assume that the state pension “triple lock” remains in place for the next 50 years.

And there is every reason to believe that the triple lock may not last long past the next General Election… with the party that comes to power possibly linking it to average earnings or inflation instead.

Steve Webb’s FOI reveals that DWP has also run similar projections on these bases and, under both of these alternative assumptions, millions more people of working age can be expected to face a disappointing retirement.

This is because so many are currently failing to save enough to provide a retirement income in line with their expectations.

Benchmarking pensions

The FOI provides three benchmarks for how much people might need in retirement:

•          A “target replacement rate” – basically that the median earner should be able to replace about 67% of their pre-retirement income when they retire; the lowest earners need to replace 80% of their income post-retirement on this benchmark, and the highest earners need to replace 50%;
•          The “minimum” benchmark set by Pensions UK (previously PLSA) for a very basic retirement;
•          The “moderate” benchmark set by Pensions UK for a “middling” retirement;

DWP’s estimates for how many people are under-saving relative to these benchmarks show that:
•          Rather than 14.6m (43%) of people of working age facing a sharp drop in their standard of living on retirement, dropping the triple lock would lead to 19.0m (56%) facing such a drop if the pension was linked to earnings and 26.1m (77%) if it was linked to inflation;
•          The numbers failing to meet even the Pensions UK minimum threshold would rise sharply if the “triple lock” were to go; an earnings link in future would see an extra 1.4m failing to reach this minimum threshold, whilst a price link would see more than 7m extra pensioners likely to retire below this basic standard;
•          The numbers set to miss out on a “moderate” standard of living are already very high with 25.4m or 73% set to fall short; weakening the uprating of the state pension would add up to 3.4m more to the number falling short.

“Shocking” figures

Commenting, Steve Webb, partner at pension consultants LCP said: “These shocking figures reveal that the true state of under-saving for retirement in Britain is far greater than has previously been admitted.

“Very few people expect the triple lock to continue for another fifty years, yet this is the basis on which the Government has so far published estimates. If the triple lock were to be replaced by an earnings link, millions more people would face a sharp drop in their standard of living when they retire.

“And a prices link, as was the policy until 2010, would see around 1 in 3 of today’s workers set to retire short of even a bare ‘minimum’ standard of living.”

Making sure YOU aren’t in for a disappointing retirement

If receiving the State Pension forms part of your financial plans in retirement, it might be wise to make sure that you’ve factored in future increases.

By using the RetireEasy LifePlan, you can run a series of different scenarios to test out how resilient your plans will be in a variety of future circumstances – should, for instance, it become means-tested or you opt to delay receiving it in order to increase payments in later years.