The £79bn additional cost of Britain’s ageing population will probably be borne by a rapidly increasing state pension age, a consultant at Towers Watson has said.
David Robbins said a report that showed Britain’s ageing population will lead to an extra £79bn in public spending by 2064/65 would probably not alter the government’s strategy on pensions.
The Office for Budget Responsibility’s fiscal sustainability report said: “The government would end up having to spend more as a share of national income on age-related items such as pensions and health care, but the same demographic trends would leave government revenues roughly stable.”
However, Mr Robbins said tax relief and the triple lock on the state pension were unlikely to be altered massively in favour of a rising state pension age.
He said: “If you are told you are going to get your state pension a year later, that is about £8,000 they take off you, but most people would be pretty unhappy if the government removed £8,000 from them directly.
“There has been pretty little protest about the increases in state pension age, partly because it is so far into the future.
“In addition, having people in poverty will increase benefit costs for them, so that is why they will err on the side of increasing the state pension age.”
He added that the triple lock commitment – that the state pension will increase by the highest of average earnings, inflation or 2.5 per cent – will only be a burden on public finances when earnings are low, such as they are at the moment.
Continuation of the triple lock was a pledge made in the Conservative manifesto before the election.
However the OBR’s welfare trends report, also released last week, said that original estimates for the cost of the triple lock were £0.4bn in 2014/15, but because of higher inflation and lower earnings it has ended up costing £2.9bn.
It went on to say that the triple lock would continue to cost more than uprating by average earnings in 2015/16, and the OBR’s March 2015 forecast suggested this would be the case in 2016/17 as well.
Kate Smith, regulatory strategy manager at Aegon UK, said: “For today’s pensioners and those retiring in the near future, the triple lock is an important, generous method of protecting the value of the state pension.
“However, a major challenge facing society is the UK’s ageing population and while there is a commitment to maintaining these benefits to older people, demographic trends cannot be ignored.”
| Impact of the triple-lock guarantee on basic state pension uprating | |||||||
| Per cent uprating and percentage point difference | |||||||
| June 2010 Budget | March 2015 Budget | Change | |||||
| Year of uprating | Pre-measures | Triple-lock uprating | Difference | Pre-measures | Triple-lock uprating | Difference | Difference |
| 2012/13 | 2.0 (E) | 2.6 (CPI) | 0.6 | 2.9 (E) | 5.2 (CPI) | 2.3 | 1.7 |
| 2013/14 | 2.1 (E) | 2.5% (PC) | 0.4 | 1.6 (E) | 2.5% (PC) | 0.9 | 0.5 |
| 2014/15 | 3.9 (E) | 3.9 (E) | 0.0 | 1.2 (E) | 2.7 (CPI) | 1.5 | 1.5 |
| Key: E = earnings; CPI = consumer price index; PC = 2.5 per cent | |||||||
According to the OBR, the size of the population will increase by 5.6 per cent over the next 50 years, with the working-age population up 6.5 per cent and the over-65 population up 3.4 per cent.
But John Broome Saunders, actuarial director at Broadstone, has warned this would not be the worst-case scenario.
He said: “The OBR’s central projections are based on the Office for National Statistics’ population projections, which assume long-term improvements in mortality rates of just over 1 per cent a year.
“That is relatively mean compared to many private sector schemes that might be using an assumption of 1.5 per cent, or even 2 per cent.
“If mortality rates improve at a faster rate, that ageing population will get even older – and thus the OBR’s rather bleak picture of the future might not be bleak enough.”
Adviser view
Ben Sear, managing partner at Suffolk-based Martin Redman Partners, said: “Ultimately, a commitment to providing a state pension for all is not sustainable. Sadly, the numbers no longer add up.”
