The government could face a “stark choice” between raising the state pension age or reducing the value of triple lock due to higher-than-expected costs, according to Interactive Investor.

The firm said the cost of the state pension triple lock could reach £9bn in 2024/25, with the total state pension bill £2bn higher than the current Department for Work and Pensions (DWP) forecast.

The triple lock ensures that the basic state pension received in retirement rises each year in line with whichever is the highest out of three factors: Wage growth, inflation or 2.5 per cent.

Following analysis of figures from the Office for Budget Responsibility (OBR), which produces forecasts for Consumer Prices Index (CPI) and Retail Prices Index (RPI) inflation, DWP state pension data, ONS wages data and Bank of England inflation forecasts, Interactive Investor estimated that the cost of the triple lock would be £9bn in 2024/25.

With wage and CPI inflation higher than expected when the DWP made its forecast in March 2023, Interactive Investor said its figures suggested the total state pension cost is likely to be £2bn more than the government planned for.

Commenting on the calculations, Interactive Investor’s head of pensions and savings, Alice Guy, said: “ONS wages data showed that average wages rose 6.9 per cent between March and May 2023.

“While inflation also remains stubbornly high, expected to average 6.9 per cent in Q3 based on the latest Bank of England forecast.”

The DWP budget, set in March 2023, was based on average inflation 5.4 per cent for the third quarter of 2023.

“This has a knock-on impact on the state pension which is guaranteed to rise by the higher of inflation in September, average wages over the summer and 2.5 per cent,” Guy added.

However, Guy said that lower inflation and falling wages thanks to a “loosening” labour market could help to bring about a “slightly lower state pension bill.”

“It’s a huge headache for the government, as an aging population means that the state pension is soaring, becoming an ever-bigger proportion of total government spending,” she said.

“In the long run, the government could face a stark choice between reducing value of the triple lock or the raising the state pension age more quickly than planned.

“There are no easy solutions as even with the triple lock, the cost-of-living crisis means that an increasing number of pensioners are living in poverty.”

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