The triple lock mechanism was introduced in 2011 and has been increasing how much more state pension people receive each year since. However, it has been criticised as unsustainable and unpredictable, with the Institute for Fiscal Studies claiming it “disproportionately benefits better-off pensioners”.
The think tank said it would be “sensible” to move away from the triple lock and proposed a possible alternative, similar to the system currently in use in Australia, known as a ‘smooth earnings link’. It claimed this would provide more stability and predictability for both the government and pensioners to count on.
The triple lock increases state pension each year in line with the highest of three figures:
- National wage increases
- Inflation
- 2.5%
This allowed the state pension sum to stay ahead of inflation at all times, even during severe market volatility such as during the pandemic. However, concerns about it’s longevity have been raised in times of economic volatility which has made it more costly and difficult to forecast.
The IFS noted: “While the triple lock has helped increase pensioner living standards over the last 15 years, a better approach is needed for the future.”
It recommended that the government consider the smooth earnings link, which would set a target for state pension at median full-time earnings so state pensioners should receive the median, not average, of what a full-time employee is receiving in the UK.
If the state pension falls below this target, it could then be increased in line with wage growth. And if inflation goes above the average earnings growth then the state pension sum would increase in line with inflation instead.
The think tank report suggested: “In most years when the state pension is at the target level and earnings are growing in real terms, the state pension would be uprated in line with average earnings growth. But in years when inflation rises above average earnings growth, the state pension would instead rise in line with inflation.
“This inflation protection would then continue as real earnings recover to allow the state pension to return to its target fraction of average earnings.
“Together, these features of the smoothed earnings link would mean that the state pension both keeps up with growing standards of living in the long run, while providing inflation protection in times of economic turmoil.”