The UK government should prepare a medium-term reform of the state pension triple lock and consider extending automatic enrolment (AE) to the self-employed, the Organisation for Economic Co-operation and Development (OECD) has said.

In its latest Economic Survey of the United Kingdom, the OECD warned that the triple lock was creating increasing uncertainty about state pension expenditure, while gaps in private pension participation were leaving groups, including the self-employed and women, at risk of inadequate retirement incomes.

The report said the UK pension system was performing well overall, supported by the combination of the pay-as-you-go state pension and the country’s extensive funded private pension sector.

However, it identified a “dual challenge” of preserving the fiscal sustainability of the state pension while improving private pension saving among groups currently underserved by the system.

Therefore, the OECD recommended that the government prepare a medium-term reform of the triple lock that would preserve pension adequacy while reducing expenditure volatility and improving fiscal sustainability.

Under the triple lock, the state pension increases each year by the highest of average earnings growth, Consumer Prices Index inflation or 2.5 per cent.

The OECD argued the policy was "unusually generous" by international standards and exposed public finances to macroeconomic volatility, as weaker earnings or inflation in one year did not offset particularly large upratings in another.

It suggested that one possible alternative would be to uprate the state pension using the average of earnings growth and CPI inflation.

The OECD also suggested that a more gradual reform could link increases to CPI inflation while periodically adjusting the pension to maintain a stable relationship with average earnings.

It acknowledged that reform would be politically challenging, particularly given the government’s commitment to retain the triple lock for the current parliament, and said preparations should include consultation, clear communication and consideration of the distributional effects.

The OECD suggested that the Pensions Commission could be tasked with beginning this work, drawing comparisons with the role played by the 2002-06 commission in establishing the analytical basis for previous reforms.

It warned that, without wider fiscal and structural reforms, gross government debt could rise from the mid-2030s and approach 200 per cent of GDP by 2050.

Alongside state pension reform, the report called for action to address low private pension saving among the self-employed.

The survey noted that private pensions accounted for roughly a third of the disposable income of retired households in their late 60s, but that the benefits were distributed unevenly, with persistent gaps among lower-income households, women and the self-employed.

Indeed, the average pension provision for self-employed workers, relative to employees, was among the lowest in the OECD, reflecting low participation in private pensions.

The report therefore recommended that the government consider extending AE to the self-employed while retaining the right to opt out.

It acknowledged that self-employed workers often had volatile earnings, which would make a conventional workplace AE model difficult to replicate, but argued that using the tax system to facilitate default contributions could improve coverage.

The OECD also argued measures to increase women’s lifetime earnings and working hours, including improvements to childcare provision, could help narrow the gender pension gap.

More broadly, it warned that subdued employment among younger workers and persistent health-related inactivity could weaken the contribution base supporting the state pension.

Therefore, it called for continued reforms to improve school-to-work transitions, lifelong learning and work incentives, alongside changes to the administration of disability benefits.

OECD director of economics policy and research, Asa Johansson, said the UK needed to increase productivity and living standards while maintaining fiscal discipline.

“Delivering the government’s ambitious reform agenda, while rebuilding fiscal buffers and investing in people, energy and regions, can help secure stronger and more sustainable growth over the long term," she added.

The report also welcomed consolidation among smaller pension funds, stating that this could reduce transaction costs and enable access to a broader range of investments.

However, it reiterated that attempts to encourage pension funds to invest more domestically should not interfere with trustees’ fiduciary duty to act in members’ best interests.

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