The IFS pensions review proposals and Hymans recent pensions plan for the new government, among others, suggest maintaining the State Pension triple lock until it meets a target, and then keeping pace with that target. Setting a target will not be straightforward. First of all, do we aim for a living standard target such as the Joseph Rowntree Foundation’s (JRF) Minimum Income Standard (MIS), or a proportion of working life earnings?
Both routes have advantages and disadvantages. Targets linked to living standards can be made to vary over time if needed to suit political agendas (though if linked to the JRF MIS this would not be straightforward), but earnings-based measures are subject to their own complications.
For example, if working-age earnings go down or stagnate due to a recession, a fixed pension income will appear to replace a larger proportion of earnings without changing in actual value. There is also room for sleight of hand when it comes to how you measure national average earnings (NAE). When I worked at the Pensions Policy Institute, it became apparent that we were measuring the level of national average earnings that the new State Pension replaced differently from other organisations. So, when I said last year that the new State Pension constituted around 25% of NAE, I came up against other well-respected organisations claiming it was around 30% of NAE.
On investigation, it became clear that these differences arose from the use of a median (PPI) or a mean (other organisations) to measure average earnings. Neither is necessarily right or wrong. I would generally favour a median because it reflects the typical experience without being distorted by extreme values or outliers.
Something I would love to do, but have not yet had the chance, is to investigate whether national measurements of the level of State Pension have ever switched between the median and the mean. It’s a small, insignificant-seeming change, but it could artificially inflate the level of income people are perceived to receive, without actually improving anyone’s standard of living.
Like most people, I am very hopeful that the Government’s pensions adequacy review will consider and provide both a State Pension and private pension target. Without them, we will continue to make policy in a vacuum. But these targets need to be sound, and we need guarantees about how they are measured and the future integrity of the figures.
We only have to look at the CPI and RPI changes to see that unless there are firm guarantees about measurement and consistency, and those guarantees are kept to, future pensioner income levels can be significantly altered.
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