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Ministers should ditch the pensions “triple lock” as part of a wider overhaul that is needed to prevent millions of private sector workers experiencing a sharp fall in living standards when they retire, a new study has found.
Some 39 per cent of company workers will face a financial cliff-edge in retirement under current arrangements, a two-and-a-half-year study between the Institute for Fiscal Studies and asset manager Aberdeen’s financial fairness charity found.
The study projected half of middle and high-earning private sector employees are not on track to reach their “target replacement rate” — a benchmark for avoiding large falls in living standards.
Some 13 per cent face an income lower than the “minimum standard” set out by the Pension and Lifetime Savings Association, defined as a post-tax income of £13,400 a year per person, or £21,600 for a couple, for most pensioners.
The lack of pension saving among the self-employed means that as many as two-thirds are projected to fall below the minimum standard, the research found.
“Without decisive action, too many of today’s working-age population face lower living standards and greater financial insecurity through their retirement,” said Paul Johnson, co-director of the pension review carried out by the IFS.
To make state pension payments more predictable and affordable over the long-term, the think-tank recommended breaking the “triple lock” and choosing a new target level as a fraction of economy-wide average earnings, currently about 30 per cent, while ensuring it grows at least in line with inflation.
Sir Keir Starmer’s Labour government has vowed to protect the triple lock, which was introduced by the 2010 coalition government, and ensures the state pension increases every year by consumer price rises, average earnings growth or 2.5 per cent, whichever is highest.
The IFS’s intervention adds to the growing chorus of voices calling for an end to the lock, including former pensions minister Baroness Ros Altmann. Its abolition was even advocated by current pensions minister Torsten Bell in his previous role leading the Resolution Foundation think-tank.
Ministers are preparing to launch a review into pensions adequacy, which is expected to look at the state pension as well as the level workers automatically pay into their pension and the lack of retirement savings among self-employed people.
The IFS and the “abrdn Financial Fairness Trust” recommended four key areas for reform to help improve retirement outcomes, including mandatory pension contributions from employers.
Johnson said the recommendations gave government a “clear and affordable road map” to help workers save more in an affordable way, shore up the state pension and help individuals make the most of their savings through retirement.
The report recommended ending a practice where employer pension contributions only have to be made if the employee also contributes. Instead, all staff aged 16 to 74 should receive at least an employer contribution worth 3 per cent of their total pay.
It also suggested increasing the minimum default total pension contributions for those with average earnings and higher, to boost private pension saving while protecting the take-home pay of people with low earnings.
Under the current auto-enrolment rules, workers over the age of 22 who earn over £10,000 a year pay at least 8 per cent of qualifying earnings into their pension, of which at least 3 per cent comes from their employer.
The review also found that 80 per cent of self-employed workers are not saving for a pension, and recommended integrating pension contributions to self-assessment tax returns to encourage saving.
These proposals could generate an additional £11bn per year of private pension saving, the IFS calculated.
The IFS also laid out plans to improve targeted financial support to alleviate a rise in pension poverty through universal credit and housing benefit, while ensuring the state pension is never means-tested.
Helping people manage their defined contribution pension pots in retirement was also a “huge” and “immensely difficult” problem with more work needed to consolidate small pots and ensure people are presented with appropriate income options in an accessible manner, it added.
“Pensions need long-term planning and, ideally, a broad consensus,” said David Gauke, former work and pensions secretary and chair of the steering group of the IFS’s pensions review. “The proposals put forward maintain an important balance between the state, employers and workers.”
