A major new report, published as part of the Pensions Review, led by the Institute for Fiscal Studies in partnership with the abrdn Financial Fairness Trust, suggests a new way forward for the state pension system, designed to provide a basis for financial security in retirement and ensure the state pension has a sustainable long-term future.

As has happened with the National Living Wage, government should state what it believes to be an appropriate level for the new state pension relative to average earnings. It currently stands at 30% of median full-time earnings, which is its highest share since at least 1968, though it remains less generous than state pensions provided in many other advanced economies that have much more limited provision of private pensions. Having set a target, the government should then legislate a pathway to meet it with a specific timetable. In choosing the level of the new state pension, the government has to consider the trade-off between a higher income for pensioners and the cost to the public finances.

The current state pension has many strengths, not least its simplicity. But research by the Pensions Review indicates several problems. There is no sense of what level the pension will reach or when – the ‘triple lock’ provides neither future pensioners nor government with any certainty regarding the level of the state pension. Many younger people have little confidence in the continued existence of the pension.

And decisions over increasing state pension age are uncertain.

Key findings

For the long-run direction for the state pension, the Pensions Review suggests a new ‘four-point pension guarantee’ to provide greater certainty and confidence over what people can expect to receive from the state pension. These four points are:

Once the state pension has reached its target level, increases in the state pension will in the long run keep pace with growth in average earnings, which ensures that pensioners benefit when living standards rise.

Both before and after the target level is reached, the state pension will continue to increase at least in line with inflation every year.

The state pension will not be means-tested.

The state pension age will only rise as longevity at older ages increases, and never by the full mount of that longevity increase. To increase confidence and understanding, the government will write to people around their 50th birthday stating what their state pension age is expected to be. Their state pension age would then be fully guaranteed 10 years before they reach it.

These suggestions are carefully designed to build on the strengths of the current state pension system and to address some of the key challenges identified in the Pensions Review report.