The Institute for Fiscal Studies (IFS) is calling for a revision of the current state pension triple lock, arguing in favour of a system that prioritises average earnings.
The IFS has raised concerns over the state pension’s fluctuating increases, emphasising the impact on groups with lower life expectancies. The research underscores the significance of the state pension for lower-income households and addresses challenges posed by the ageing population, the triple lock policy, and public sentiment.
The proposal suggests linking the state pension to average earnings for yearly increases tied to inflation during economic contractions. It recommends raising the pension age based on life expectancy and using inflation as a minimum floor for baseline financial support. It also proposes a target level of one-third of median full-time wages and opposes means-testing.
State pension is expected to rise from its current value of £10,600 per year, which is 30 per cent of median earnings, to more than £11,500 by April 2024.
Meanwhile, AJ Bell criticises the unpredictable nature of the triple-lock and joins in calling for consistent state pension plans. It recommends an impartial, cross-party assessment to address the impact of the triple lock on pension negotiations and argues that, for a more cohesive approach, the government should define the value of the state pension in relation to median earnings.
Evelyn Partners partner in financial planning and retirement specialist Gary Smith says: “Fresh thinking on the conundrum of the state pension and the triple lock is always welcome and the IFS report provides lots of food for thought. It identifies some of the increases to the state pension under the triple lock as having been overly generous and fiscally unsustainable, and that is certainly arguable.
“But it’s not clear, for instance, how its suggested ‘double lock’ of ‘earnings indexation with inflation protection’ would have moderated the 10.1 per cent SP increase determined by the triple lock for this financial year, and the 8.5% increase due in April – as the former rested on inflation and the latter on earnings. The IFS does stress that it would use ‘median full-time earnings’ in its new model.
“But for the moment, if there is a problem with the levels of SP increase in some years – whether in terms of perceived fairness or affordability to the public purse – it is more with how the inflation and the average earnings elements of the triple lock are measured. Using the September rate of CPI inflation and average earnings growth that includes bonuses, seem both to be slightly arbitrary and likely to produce unpredictably high or low one-off outcomes.
“Reforms as proposed by the IFS report might have a lot going for them but they will take time, and one easy step for the authorities to make the triple lock more sensible and perhaps less controversial, would be simply to change the metrics that it is based on to give less volatile readings for inflation and average earnings.”
AJ Bell director of public policy Tom Selby says: “The state pension is supposed to be the bedrock upon which people can build their retirement plans. However, uncertainty over both the value of the state pension and when people can expect to receive the benefit undermines confidence in the system. The state pension and wider retirement savings policy are all too often caught in the mire of politics, with decisions made based on short-term priorities rather than with the aim of giving people long-term certainty.
“The state pension triple-lock is a classic example of this. This policy, introduced over a decade ago by the coalition government, is both generous and entirely aimless. Yet there is every chance we will go into the general election with all major political parties committing to the triple-lock in their respective manifestos. While this might be good news for pensioners in the short term, it will mean the debate over what the state pension should be worth and when it should be paid to people is kicked down the road again.
“The IFS’ suggestion that government sets out what the state pension should be worth in relation to median earnings is a sensible one. It would certainly be a much more coherent plan than the triple-lock, which randomly ratchets up the value of the state pension depending on earnings growth and inflation at a specific point in time each year. Similarly, building greater certainty into future state pension age increases would help give savers confidence that the goalposts won’t be moved.
“An independent review with cross-party support may be necessary to break the hold the triple-lock has on discussion about the future of the state pension. Politicians need to be brave enough to kick off an honest debate about what the state pension is aiming to deliver in retirement, how it should look over the long term and the associated costs. Without that, we risk remaining in a triple-lock-induced Groundhog Day, where the only real question is whether or not that policy will be retained.”