The IFS said that the Government should state what it believes to be an appropriate level for the New State Pension relative to average earnings and then legislate a pathway to meet a guarantee.

This is a similar approach to the one that has been taken with the National Living Wage.

The IFS’ new Pensions Review report, in partnership with the Abrdn Financial Fairness Trust, said the guarantee would provide a basis for financial security in retirement and ensure the State Pension has a sustainable long-term future.

The guarantee would have four key points:

1. Once the State Pension has reached its target level, increases will keep pace with growth in average earnings, which ensures that pensioners' benefit when living standards rise
2. Both before and after the target level is reached, the State Pension will continue to increase at least in line with inflation every year
3. The State Pension will not be means-tested
4. The State Pension age will only rise as longevity at older ages increases, and never by the full amount of that longevity increase. To increase confidence and understanding, the Government would 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.

The IFS said this approach would address some of the key challenges identified in its Pensions Review report.

The key challenges identified by the report including the pressure of longevity on public finances, the ratcheting up of the value of the State Pension by the current Triple Lock, issues with confusing jargon and pessimism around the State Pension. Another challenge is not to adversely impact poorer people.

Heidi Karjalainen, a research economist at IFS and author of the report, said: “A commitment by the Government to a set level of the New State Pension relative to average earnings would ensure that pensioners continue to benefit from higher State Pensions as living standards rise. Under our suggested guarantee, they would also be protected from falls in their purchasing power when inflation is high or earnings growth is very weak. In choosing a target, the Government would have to balance carefully the benefits of a higher state pension income, and the cost to the public finances of providing the pension.”

The Pensions Review is a 30-month-long project that will comprehensively assess the consequences of current pension policy, the economic environment and individual behaviour for the future of living standards in retirement. It will also provide recommendations for reform to improve outcomes for future generations of pensioners across the UK.

A copy of the full report can be downloaded from the IFS website.