IFS calls for triple lock to be replaced with earnings link

The Institute For Fiscal studies has called for the state pension triple lock to be scrapped and replaced with a system that emphasises average earnings, with inflation providing a minimum floor for state pension increases.

The IFS report says 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.

In terms of setting ongoing values for the state pension, the IFS recommends that:

• There is a target level set for the state pension expressed as a share of median full-time earnings – for instance a third.

• Thereafter, the state pension will 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.

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

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".

Heidi Karjalainen, a research economist at IFS and author of the report, said: "A commitment by the government to a set level of the new state pension relative to average earnings would ensure that pensioners continue to benefit from higher state pensions as living standards rise. Under our suggested guarantee, they would also be protected from falls in their purchasing power when inflation is high or earnings growth is very weak. In choosing a target, the government would have to balance carefully the benefits of a higher state pension income, and the cost to the public finances of providing the pension."

Gary Smith, partner in financial planning and retirement specialist at Evelyn Partners, commented: “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% 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.

“But for the moment, 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.”