Looking at the UK’s first State Pension Age review...

I was writing an article the other day in which I made the point that, with the changing demographics in the UK, one of the Government’s main tools for controlling costs and behaviour is the State Pension Age (SPA).

With replacement ratios falling (i.e. the number of taxpayers supporting pensioners) there is a smaller base who can pay increased taxes, unless you seek to tax wealthier pensioners.

Lo and behold, on 1 March, it was announced that John Cridland had been appointed by the DWP and the Pensions Minister to lead the UK’s first SPA review.

This was initiated by the Pensions Act 2014 which required that the SPA should be reviewed under each Parliament in order to take into consideration increasing life expectancy and other societal changes - the review needs to be completed by 2017.

This reminded me of another article that I wrote several years ago in 2011 where I said: “It used to be that the age at which we retire was a definite cut-off point that was pretty much set in stone.

“Today, it is a variable, and one of the key retirement issues. In fact, age is very much on the agenda, particularly with public sector employees being asked to work until age 66 for future pension benefits, and the perceived injustice of accelerated increases to the SPA, particularly for women.”

I think we are well aware that we are all living longer and that, as a result, the age at which we have to work has to increase.

This requires some big societal decisions to be made:

• At what age is it reasonable for the state to provide a state pension?
• Should there be a prescribed timescale for such changes?

The Pensions Policy Institute recently produced research which stated that in 1981 individuals received the state pension for 25% of their adult life. Due to increases in longevity this had gone up to 30% in 2000 and 33% by 2010.

The PPI concludes that to maintain the ratio at 33%, the SPA would need to be 66.5 by 2030. To keep it constant at the 2000 level of 30%, the SPA would need to rise to 68 by 2030, and to keep it at the 1981 level of 25% the SPA would need to hit 72 by 2030.

As it stands, the pace at which the SPA is equalised for women will increase from April 2016 so that the female SPA reaches 65 in November 2018, as opposed to April 2020. The SPA will then increase to 66 for both men and women between December 2018 and April 2020, unless there are any changes in the short-term.

In the recent Department for Work and Pensions (DWP) paper, ‘A state pension for the 21st Century – public consultation’**, there is the proposal to either link increases to the SPA through a formula linked to life expectancy or to increase the SPA through a review.

“My hope is that having an objective mechanism/review process to consider changes to the SPA would take some of the politics out of the equation and would also allow individuals a prescribed notice period before the change comes into force.

The Autumn Statement in 2013 moved this on and the Government announced a core principle that would underpin any future SPA changes. That core principle was that people should spend on average one third of their adult life drawing a state pension and that the age of 20 would be used as the appropriate starting point. The whole process is outlined in some detail in a note on the DWP web site dated December 2013.

With such assumptions in mind, it would be interesting to see how some of the PPI predictions above might turn out.

Undoubtedly it is not a coincidence that the FCA also recently launched a Discussion Paper on “The Ageing Population and Financial Services” (DP16/1) with the observation that the average life expectancy of children born in 2013 is over 90 and that the number of people over age 65 already outnumbers those aged under 16.

So we are facing some difficult questions – life expectancy varies across the country and by the type of work done, leading to questions of capability. It is all well and good to say that we should consider working to age 67 or above but is it realistic? Is there a justification for jobs for older people at a time when we have high youth unemployment? Can people physically (or mentally) carry on working longer?

Several years ago Steve Webb, the then Pensions Minister, said: “We need to culturally shift to a view where frankly people recognise we cannot have a definite answer on the question of when they will retire because we do not know what’s going to happen to life expectancy. You will know what ballpark you are in but you won’t know exactly.”

To return to my 2011 Article – I concluded:

“We are all living longer and will work longer if there are jobs, if we are physically and mentally able to do so and perhaps most importantly, if we have to. The State will need to decide what it can afford and how much the state pension should be and from what age and also what the future shape of incentives to save should look like.”

One of the things that I have found after years of working in this industry is that the big questions do take some time to answer.