Labour urged to scrap state pension triple lock
The government should scrap the £145bn triple lock on the state pension and employers should automatically contribute to private pensions, the Institute for Fiscal Studies (IFS) has said.
Labour’s election manifesto last year said it would commit to keeping the state pension, while the Conservative Party pitched a ‘triple lock plus’ pension that would increase the personal allowance for pensioners by at least 2.5 per cent.
But the IFS suggested the Labour government had to rethink savings, given the proliferation of defined contribution (DC) plans taken on by workers over defined benefit (DB) schemes often provided by employers.
In a report co-produced with abrdn Financial Fairness Trust, researchers said one in five private sector employees and 80 per cent of self-employed workers were not saving in a private pension, with DC arrangements meaning 40 per cent would “miss a standard benchmark for an adequate retirement income”.
The think tank called on the government to mandate that all employers make contributions to pension schemes worth three per cent of workers’ pay, boosting private saving by around £11bn a year.
It stated that the reforms should be accompanied by a new target level for the state pension as a percentage of economy-wide average earnings to alleviate the strain on public finances.
The current triple lock system means the state pension increases by whichever is highest out of inflation, wage growth or 2.5 per cent.
In current price terms, the IFS said weekly payments would rise from £230 to £250 by 2043. The government’s bill on the state pension is set to come to £145.6bn next year.
But the think tank suggested the UK government should model its system on Australia and peg the state pension to inflation.
The state pension age should only rise in line with increasing longevity at older ages, the report said.
State pension payments to surge to £181bn
The recommendations come as the government will introduce the second phase of its pension review, which will focus on “retirement adequacy”.
The Office for Budget Responsibility said pension benefit spending would reach £181.8bn by 2030, with the triple lock cited as a “main driver” of a predicted increase.
“Spending on [pensioners] increases total welfare spending between 2023-24
and 2029-30 by 0.5 per cent of GDP, offsetting the equal and opposite fall in all other
welfare spending,” the OBR’s latest fiscal outlook report noted.
Paul Johnson said there was a risk government officials were becoming “complacent” on benefits for non-working age Britons, with today’s working-age population likely to face lower living standards through their retirement”.
“Pensioner poverty is way down on the very high levels in the 1970s and 1980s, and is indeed below that for other demographic groups,” Johnson said.
“The state pension has been simplified and is now much more generous to many women than in the past. Many more employees have been brought into workplace pensions by the successful roll-out of automatic enrolment.
“Our recommendations give the government a clear and affordable roadmap: shore up the state pension, help workers save more – but only in periods when they are better placed to do so – and help individuals to make the most of their pension pots through retirement.”