The IFS calls to end the state pension triple lock

A research institute has called to scrap the triple lock and replace it with a system that emphasises average earnings. 

The Institute for Fiscal Studies (IFS) published a report this month, which calls to end the state pension (SP) triple lock and replace it with a ‘double lock’ system that emphasises average earnings, with inflation providing a minimum floor for state pension increases.

The IFS report said the triple lock has resulted in unpredictable and sometimes overly generous increases to the state pension, and that increasing the state pension age to compensate for the expense of the triple lock was unfair to those with lower life expectancy, who tend to be poorer.

The 100-page document entitled ‘The future of the state pension’ recommends there should be a target level set for the state pension expressed as a share of median full-time earnings – for instance a third.

It believes the state pension will then keep pace with growth in average earnings, but when average earnings drop or flatline in times of recession, the state pension will still rise in line with inflation every year.

Compared with this, the IFS projects that the triple lock ‘could easily cost anywhere between an additional £5 billion and £40 billion per year in 2050 in today’s terms’.

The report said: “Most pensioners rely on the state pension to provide the majority of their income in retirement. In the current year, 2023, 12.8 million individuals across Great Britain receive an average of £187 per week from the state pension. While most would need a considerably higher income in order to preserve their working-age living standards through retirement, it is a sum that very few who are retired could do without.

“It is therefore imperative that we have a secure and sustainable state pension system that continues to serve its purpose of providing an important source of income throughout retirement for future generations of pensioners.”

The IFS has also rejected means testing as a way of reducing the expense to the public purse for the state pension, and instead recommends that the state pension age should rise only as proportion of longevity increases, not by the full amount. 

Food for thought

Gary Smith, partner at UK wealth manager Evelyn Partners, said the IFS report provides ‘food for thought’ on the future of the state pension. 

He said: “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 it's suggested ‘double lock’ of ‘earnings indexation with inflation protection’ would have moderated the 10.1% state pension 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.”

He added that the problems with the SP increases are often down to how the inflation and the average earnings elements of the triple lock are measured.

Smith added: “If there is a problem with the levels of state pension 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.”

A broader framework for adequacy

Phil Brown, director of policy at People’s Partnership, which is the provider of The People’s Pension, called for a broader framework for pension adequacy to set out the level of retirement income people may get from both the state pension and workplace pension saving.

He said: “The IFS report is a major contribution to the debate but what we need now is a broader framework for pension adequacy, setting out the level of retirement income people may get from both the SP and workplace pension saving. Without that framework, it’s very difficult to reach conclusions about the right future level of the state pension and the means by which it should be uprated as well as whether the level of workplace pension saving is enough.”

A safety net

Nigel Peaple, director of policy & advocacy at the Pensions and Lifetime Savings Association (PLSA), said it is important that state pension should be set at a value which protects everyone from poverty in retirement and covers all basic needs. 

He added: “Making up the majority of most pensioners’ income, the state pension, today worth £10,600, plays a vital role in protecting everyone from poverty in retirement. This is why in the PLSA’s recommendations for reform of the UK’s pension system, Five Steps to Better Pensions published in October, we said that the state pension should be set at a value to protect everyone from poverty in retirement and cover all basic needs.

“We also recommended that its value be maintained by use of the triple lock, with increases in real terms to continue when affordable until it reaches a new target value of the Retirement Living Standards Minimum Level. Updated each year based on independent research, this is currently £12,800 for a single person or £19,900 for a couple excluding mortgage or rent costs. 

“Some aspects of today’s IFS proposals adopt a similar approach as they call on Government to set a clear objective for the state pension, although they suggest that it should be linked to a percentage of median earnings rather than a living standards level, and that it be uprated generally in line with earnings growth while also including a mechanism to protect against high inflation.

“While these proposals are not identical to our own, they do aim to set an enduring and stable settlement and potentially result in very similar retirement income outcomes. We welcome these additional proposals and believe they merit careful consideration.”