IEA Urges Pension Freeze and Defined Benefit Reform Ahead of Budget

Proposals to freeze State Pension payments and phase out defined benefit retirement schemes have emerged ahead of the UK government's next Budget on October 28, when Chancellor John Healey is scheduled to announce fiscal measures. The Institute of Economic Affairs (IEA), a free-market think tank, outlined the recommendations in its Alternative Budget, arguing that spending restraint and changes to taxation should help control public borrowing and the national deficit.

The IEA's proposals include suspending the pension triple lock, freezing the basic State Pension in cash terms and gradually reducing the ceiling on welfare spending. The recommendations represent the think tank's policy proposals rather than confirmed government decisions.

In its document, the IEA said the government should "bring rising national debt and the deficit under control by combining more sensible taxation with spending restraint".

The think tank proposed tighter limits on welfare expenditure as part of that approach.

The document stated: "Welfare spending would be frozen in cash terms, with its ceiling then reduced by 0.85% annually for three years."

The IEA also recommended suspending the existing mechanism that links annual State Pension increases to inflation, earnings growth or a minimum increase of 2.5%, whichever is highest.

Its proposal stated: "The pension triple lock would be suspended and the basic State Pension would be frozen over that period."

Beyond changes to state benefits, the IEA suggested reconsidering defined benefit pension schemes, which provide retirement income calculated using factors including salary and length of service.

The think tank recommended "phasing out defined benefit pensions" as part of its proposed reforms.

Explaining the potential effect on employers and savers, the IEA wrote:

"This would make future employer commitments more predictable, whilst transferring more investment and retirement-income risk to savers,"

The organization also addressed how existing pension obligations could be financed if contributions were redirected into individual retirement accounts.

It stated: "Diverting contributions from unfunded schemes into individual pension pots would leave existing pensions needing replacement financing.

"Any reduction in future commitments ought to be weighed against transitional cash costs, as explained in HM Treasury’s Hutton report (Independent Public Service Pensions Commission 2011)."

The government has separately indicated that changes to the triple lock are under consideration. Work and Pensions Secretary Pat McFadden previously described a possible revised formula for annual pension increases.

Under that proposed model, increases would be based on whichever is highest: inflation, 2.5% "or what is required to maintain its record high level against average earning", McFadden said earlier this month.

McFadden has defended reforming the existing system as a necessary response to the challenges surrounding pension policy.

He described reforming the triple lock as the "right answer to a difficult question" and warned that changes to the current policy were "inevitable".

Addressing MPs in the House of Commons, McFadden also argued that the government's wider approach would protect lower-income retirees despite potential changes to the pension system.

He said "pensioner poverty is set to fall" under the government's overall plan.

McFadden added that the government-backed Pensions Commission had been asked to examine ways of "further supporting lower-income pensioners". The commission is tasked with exploring retirement outcomes and potential support for pensioners with limited incomes.

McFadden also highlighted increases already planned under the existing State Pension system, which uses average earnings growth, Consumer Price Index inflation or 2.5% to determine annual rises.

He said: "This year, the full new state pension is rising by £575,"

McFadden said the increase would contribute to higher payments over the current parliamentary term.

He added: "It is set to be over £2,000 a year more by the end of this Parliament compared to when we took office in 2024. That will take the new state pension to over 30% of average earnings by the end of the Parliament (in 2029) – this is forecast to be a record high."

Healey is scheduled to deliver the Budget on October 28, providing the next major opportunity for the government to set out its fiscal plans and clarify its approach to pension policy.