A major overhaul of Britain’s state pension system has been proposed by the Institute for Fiscal Studies in order to address concerns over the retirement benefit’s ballooning expense.
The think tank’s latest Pensions Review, alongside abrdn Financial Fairness Trust, has suggested the triple lock should be axed and the Government should commit to not means-test pension payments.
These proposals seek to tackle significant risks to the financial security of upcoming retiree generations while addressing fundamental weaknesses in the current system.
Overall, said reforms encompass a guaranteed state pension framework, enhanced private savings mechanisms, improved assistance for vulnerable groups, and practical solutions for pension management during retirement.
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State pension reform has been proposed
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GETTYUnder the triple lock, pension payment rates go up every year by either the rate of inflation, average wage growth or 2.5 per cent; whichever is the highest.
Notably, the IFS has suggested the state pension should never be means-tested and called for current means-tested support to be improved for those approaching retirement age.
As part of the reforms, ministers would establish a specific benchmark for the new state pension relative to typical wages, with the current value representing 30 per cent of median full-time earnings.
Once this benchmark is achieved, annual increases would match average wage growth rather than continuing with the triple lock mechanism. However, pension values would never fall below inflation levels, with temporary adjustments permitted when price rises outpace earnings.
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Additionally, eligibility age would increase only in response to improvements in life expectancy amongst older people, though at a slower rate, ensuring recipients enjoy longer retirement periods overall.
The targeted approach to private pension savings would see fundamental changes to workplace contributions. Every employee between 16 and 74 would receive mandatory employer contributions worth three per cent of their total salary, regardless of whether they contribute themselves.
Default contribution rates under automatic enrolment would rise, particularly for workers earning average wages or above, while protecting the take-home pay of those experiencing periods of lower earnings.
New systems would enable self-employed individuals to make pension contributions through their tax self-assessment processes. These measures would generate an extra £11billion annually in private pension savings, comprising £5billion from employers and £6billion from employees.
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Workers heading towards modest retirement incomes would benefit most substantially, experiencing average income improvements of 13 to 14 per cent through these changes.
Individuals approaching state pension age would receive enhanced universal credit support under the proposals. This could apply to all those with limited income and assets at an annual cost of £600million, or focus specifically on people with health conditions for £200million yearly.
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Paul Johnson, former director of IFS and co-Director of the Pensions Review, said: “There is much to celebrate about the current UK pensions system. The current generation of retirees is, on average, doing much better than any previous generation.
“Pensioner poverty is way down on the very high levels in the 1970s and 1980s, and is indeed below that for other demographic groups. The state pension has been simplified and is now much more generous to many women than in the past.
“But there is a risk that policymakers have become complacent when it comes to pensions. Without decisive action, too many of today’s working-age population face lower living standards and greater financial insecurity through their retirement.
“Our recommendations give 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.”
