The state pension triple lock has been reinstated this April, following the temporary suspension last year. As a result, state pensioners will see their income being protected by the generous mechanism again. It is an important way to maintain a suitable level of state pension, since the UK state pension’s replacement rate is much lower than the OECD average¹. April’s increase is aligned with September’s inflation rate, which uprates payments this year by 10.1%, cushioning state pensioners  from the rocketing living cost. However, this is also a luxury that is seldom reflected in workers’ earnings, which is the main source of funding for the state pension. The stark contrast means the triple lock is extremely expensive to run and inherently unsustainable – this year’s increase for example will cost the government around £11billion. Back in 2016, the Work and Pensions Select Committee already recommended the triple lock be scrapped by 2020 over concerns about its sustainability².

But this is only one of the existential crises that state pension is facing. The triple lock resumes against the backdrop of a delayed acceleration of state pension age (SPA) increase to 68. Both independent reviews of the SPA in 2017 and 2022 recommended the increase to be pushed forward, partially to maintain the system’s fiscal sustainability in anticipation that life expectancy would further increase. However, while this is an efficient way to make the state pension more affordable, it is also intrinsically unfair because healthy life expectancy is usually correlated to wealth.

Determining access to the state pension with an ever-increasing SPA unintentionally allows those who are healthier, and can work longer, to enjoy their state pension for longer. Whereas those who are unable to remain in work, due to ill health for example, face higher risks of poverty in later life. Slowed growth in life expectancy is a good reason to reconsider the SPA increase’s acceleration, and should also prompt further thinking around reducing the systematic health/wealth inequality.

Reforms are clearly needed to improve both the sustainability and fairness of the state pension’s design. Baroness Neville-Rolfe’s recent independent review on the SPA for example recommends spending on the state pension to be capped at 6% of GDP. However, projections show this cap will be surpassed in 3 decades and will likely require changes to either the SPA or the triple lock to be maintained. Yet there is little political appetite to make changes to these mechanisms as they are deemed to be politically controversial.

Reforms and the impact on the public

The government’s recent decision to delay the SPA increase to after the next election, requiring the new parliament to conduct another review within two years demonstrated the dilemma. This is an expensive delay³ that requires £8-9billion per year to cover, and might not be the most efficient way of making people’s futures more secure compared to investing in other benefits. The need for reform still clearly remains but for now, is kicked down the road.

It also means the public still have no certainty on when the SPA might increase again and have less time to prepare for a potential shortfall in their retirement income. Those entitled to a full new State Pension would lose over £10,000 in income from an SPA increase to 68⁴. Over a 20-year retirement, this equates to a reduction in spending power of around £500 a year. For many impacted by an accelerated increase in SPA, working longer and saving more (e.g. into their workplace pensions) will be the default option to cover the loss. However, whether they will choose to or be able to do so is questionable.

Based on data from our Longer Lives index, 44% of defined contribution pension savers potentially affected by the 2017 recommendations are not on track to be able to afford the retirement they expect⁵. This group will need clear communications and nudges to ensure they make informed choices to meet their target income⁶. There will also be those who simply cannot work longer. 14% of people affected by the proposal are not confident about staying in work until their planned retirement age and have less than £10,000 in a private pension or other savings. This group commonly quote ill health as a concern and could suffer acutely from the loss of state pension income. They will need additional targeted support to avoid further exacerbation of wealth and health inequality in later life.

The need for public debate

Defusing the state pension time bomb will require sensible fiscal decisions and clear understanding of public opinion. We have been working with the Policy Institute at King’s College London since last year to investigate the latter specifically through large scale deliberative workshops with the public. Participants tended to display low levels of knowledge about the state pension. In fact, participants commonly overestimated their knowledge on the topic, despite struggling to explain even basic aspects of how the system worked such as what triple lock means and the amount of state pension they might receive. They highly valued the universality of state pension while recognising individuals have a shared responsibility alongside the state and employers to prepare financially for their retirement. Encouragingly, participants became more emphatic about the need for state pension reforms the more they learnt and engaged with the subject. They asked for clear communications about how state pension works and what this meant for planning their retirement income. They also wanted to ensure decisions about the state pension are made out of public interest instead of political ones. There was a perception the government’s current decision making process lacks transparency, which lead participants to feel distrustful towards their conclusions.  Given this, participants spontaneously suggested establishing an independent body to play a long-term role in the state pension’s governance.

The façade of public resistance to state pension reforms and inability to respond to a potential acceleration of the SPA increase are apparent results of information asymmetry, even on a subject of high public interest. Before the next review of the SPA concludes and any decision is made, it is vital to have informed public debates with sufficient information being shared with the public. Indeed, wider discussion on the future of state pension and its role in the benefit and pension system is long overdue. In the coming months we will be publishing findings from various research projects to drive conversations.