How UK Pensions Stack Up: Lower State Replacement Rates, Heavier Reliance on Private Savings

The state pension is on course to cost more than £150bn a year, which makes it the single most expensive benefit the British government pays for. That figure sits behind a question many people ask quietly: do British pensioners get a better or worse deal than retirees in other rich countries?

Start with how the UK got here. Since 2011, the state pension has risen under the triple lock, which raises it each year by the greatest of 2.5%, earnings growth or inflation. Those increases have outpaced the growth in workers' earnings. Funding the formula has already cost the state billions more than was first envisaged, and the bill is expected to grow. Whether that is sustainable or fair has been argued over for some time.

The picture on poverty is mixed. Housing costs have climbed quickly, and pensioner poverty has edged up slightly over the last decade. Even so, pensioners remain less likely to be in relative poverty, meaning living on less than 60% of typical household income, than either families with children or working-age people.

Andy Burnham intends to introduce a new system in a few years. The state pension would rise by at least inflation or 2.5%, and the automatic yearly link to average earnings would be removed. That would probably mean less generous increases, though pensions would still track earnings growth over the longer term.

The comparison with other countries rests on the replacement rate: how large a typical pension is relative to workers' average earnings. The OECD looks at people born at the start of the millennium who earn average wages, and assumes the pension system as it stood in 2022 remains in place. On the basic state pension alone, UK benefits look low next to other wealthy countries. That holds even allowing for the fact that British workers are automatically enrolled in workplace schemes. Counting both, and after tax, UK retirement benefits come to 54.2% of average UK earnings, against an average of 63.2% across wealthy countries.

The gap narrows once other occupational and personal pensions are added, because these are more common in the UK than elsewhere. The flip side is that anyone relying on the state pension alone is considerably worse off than many retired people abroad.

Spending tells a similar story. Although the state pension bill is large, the OECD figures show the UK spends less on total retirement benefits, relative to the size of its economy, than the average wealthy country. The OECD also expects the cost of pensions to soar in many nations by 2060, with the exceptions mostly being countries already making changes. UK costs are likely to rise by less under Burnham's revised triple lock, though more borrowing may still follow. Already, £1 in every £13 the government spends goes on interest on existing debt, and countries with more generous pensions, such as Italy, have come under pressure to reform.

In some respects, then, auto-enrolment puts the UK ahead of the game, with universal privately funded pensions for workers. But that approach raises the gender pension gap: the difference between men's and women's average pension income at 65 and over, as a percentage of men's. In most wealthy countries the typical gap is about 22.8% in men's favour. In the UK, women typically receive a pension a third lower than men, mainly because of the reliance on private pensions. The OECD's latest UK data is from 2021, so the figure may have shifted.

The causes are familiar. Women are more likely to have been paid less over their working lives, taken career breaks or worked part time, and the effect on their pension pots can be stark. As the triple lock is reshaped, that gap is the issue to watch.