State pension triple lock 'needs to end', says IFS


The Government's "triple lock" protection of pensions should be ditched before it becomes "prohibitively expensive", an influential economic think-tank has said.

The triple lock - under which state pensions go up by either inflation, earnings growth or 2.5%, whichever is the highest - has helped make today's pensioners better off than any previous generation, with average incomes for the first time higher than people of working age, said the Institute for Fiscal Studies.

But the IFS warned that people now in their 20s, 30s and 40s, whose taxes help fund the generous provision for current pensioners, are likely to end up with lower retirement incomes than their parents.

And it said that further increases in pension age - already expected to rise to 69 by the 2040s - are likely to be "vital to the sustainability of the system".

The triple lock was introduced by Chancellor George Osborne in his 2010 Budget, when he said it would provide pensioners with "the income to live with dignity in retirement".

But the IFS said it now "needs to end", as it will "at some point become prohibitively expensive". The lock injects "a bizarre degree of randomness" into future levels of state pensions, making them dependent not on overall increases in prices or earnings but on the timing of those rises, said the think-tank. 

Office for Budget Responsibility projections forecast that continued use of the lock would add well over 1% of national income to spending on pensions by the middle of the century, the IFS noted.

Speaking to the Pensions Management Institute in London, IFS director Paul Johnson said there had been a "remarkable transformation" in pensioner incomes, which had continued to rise following the 2008 crash while those of working-age households fell.

A large proportion of those retiring now will actually be better off than they were on average during their working life, he said.

While pensioners 30 years ago were at least three times as likely to be poor as non-pensioners, they are now less likely than younger generations to be poor, when housing costs and family composition are taken into account.

But IFS analysis suggests that, while pensioner incomes can be expected to carry on rising for at least another 10 years, it is "unlikely" that later generations will do as well.

Younger people are unlikely to receive the defined-benefit occupational pensions their parents enjoyed and can expect to face less generous state pensions. And an "extraordinary fall" in rates of home ownership means the younger generation are less likely to benefit from rises in house prices.

"We have achieved an astonishing turnaround in the incomes of pensioners over the last three decades, without increasing public spending to levels seen in many other continental European countries," said Mr Johnson.

"But the longer term future looks very uncertain. Those now in their 20s, 30s and 40s may well end up with lower incomes in retirement than their parents. The focus for policy needs to be on getting private provision right, with more risk-sharing, and a rational and stable tax policy".

Mr Johnson said that the new single-tier pension being introduced in April represented "a stable basis for future provision".

But he said that it "cannot be optimal" for individual savers to be left with all of the burden of risk relating to uncertain investment returns and longevity, as they do as a result of the move from defined benefit to defined contribution pension in the private sector.

Changes to ensure the risks are shared across society and across generations should be a priority, he said.