A final report on state pension age (SPA) arrangements from 2028, when SPA will have reached 67, has been published by John Cridland CBE, the SPA independent reviewer appointed by the government.
The report makes several recommendations, including that the SPA should rise to 68 between 2037 and 2039, and should not increase by more than one year in any 10-year period. On the triple-lock for state pension increases, the review also proposes that, if further savings are needed to ensure fiscal sustainability, they are more appropriately delivered by moving in the future to uprating the pension by earnings. The review recommends the triple-lock is withdrawn in the next Parliament.
For the basic state pension, there is a statutory requirement to uprate it at least in line with earnings. However, the government has a commitment to uprate it according to the triple-lock – the highest of earnings inflation, price inflation or 2.5 per cent.
The Cridland review proposes that some of the funding released by changes in SPA and other aspects of the state pension system should be reinvested to support disadvantaged groups.
The review believes there are measures that can help give people reliant on state pension some of the same flexibilities as those who have private pension provision.
n It recommends that people who defer their pension should have the option to be rewarded through a lump sum once they start drawing their state pension (currently, state pension can be deferred, and it will be increased, but there is no option to take the increase as a lump sum).
n It recommends that people over the SPA should be able to part drawdown their state pension – leaving the balance to benefit from the deferral arrangements.
n It does not recommend an ‘early retirement’ option be introduced for the state pension. If the recommendations are accepted then, as now, there will be no access to state pension before SPA.
Separately, a report on how SPA timetables might need to change beyond 2028, based on projections of life expectancy in future, has been published by the Government Actuary’s Department (Gad).
Under the two scenarios considered, the report concludes that the SPA could rise to 69 either between 2040 and 2042 or between 2053 and 2055. Under one scenario it is also stated that the SPA should increase from 69 to 70 over the two-year period from 6 April 2054 to 5 April 2056.
Why is SPA being reviewed?
In a word – cost.
The latest Office for Budget Responsibility (OBR) principal spending projections show between now and 2036 to 2037 annual state pension spending is set to rise by an extra 1 per cent of gross domestic product (GDP), from 5.2 per cent in 2016 to 2017 to 6.2 per cent in 2036 to 2037. If the same rise in spending were faced today, this would be equivalent to a rise in taxation of £725 per household a year. Additional pressures on health and social care mean that overall age-related spending is expected to rise by 6.8 percentage points of GDP by 2066 to 2067, of which 1.8 per cent is state pension.
Part of this increased cost is driven by rising life expectancy. One of the challenges in developing a long-term policy is that future changes in life expectancy are not known, and policymakers must rely on projections. Ironically, the current SPA review is being undertaken just as we are seeing evidence that rates of longevity improvement are slowing down. The Continuous Mortality Investigation (CMI), a body wholly owned by the Institute and Faculty of Actuaries, has just released a new version of its mortality projections model, which is used by most defined benefit pension schemes to set their own mortality assumptions. The 2016 version of the model provides life expectancies about 0.6 years for men and one year for women lower than the 2013 version, with most of the reductions in the rates of improvement occurring at the highest ages.
Gad’s report referred to earlier highlighted the sensitivity changes in future life expectancies have on the proposed timetables for changing the SPA. A 0.2 per cent a year change (in either direction) in the assumed long-term rate of improvement could move the calculated timetable for SPA increases by up to 10 years. Planning is very difficult in the face of such uncertainty.
There are also well documented differences in life expectancies between different parts of the UK. Scotland, for example, has lower average life expectancy than England. However, the variations in life expectancy between areas of the same country are even more pronounced, meaning individuals will receive their state pension for very different lengths of time. A single universal SPA has the benefit of simplicity, but does not address the inequalities as a consequence of the wide variations in life expectancy across the UK.
What does this mean?
The Cridland review has two implications for workers who will have to wait for longer before they can claim their state pension.
Firstly, a good private pension is more important than ever before. The state pension (£159.65 per week in 2017 to 2018) is not enough for most people to live on and, unlike private pension savings, which can be accessed from age 55 under current rules, people under 30 may need to wait until age 70 for their state pension.
At the moment, many people are not saving enough for a good outcome in retirement.
Another recommendation in the Cridland review is that there should be a “mid-life MoT” as a “trigger point” to encourage people to take stock and make realistic choices about work, health and retirement. The review recommends people should be able to access a mid-life MoT and this should be facilitated by employers and by the government using online support and through the National Careers Service.
Work on this should start immediately.
Secondly, flexible retirement requests are likely to increase as more people choose to combine part-time work/earnings with retirement/pensions. This means that employers will need to reconsider reward strategies for people who could potentially be employees, pensioners and active pension scheme members all with the same employer at the same time.
John Wilson is head of technical at JLT Employee Benefits
Key points
The Cridland Review highlights that the State Pension Age should rise to 68 between 2037 and 2039.
The SPA is being reviewed due to cost.
There are well-documented differences in life expectancies between different parts of the UK.
State pension timeline
The State Pension was introduced in 1908 with an SPA of 70.
SPA was subject to a number of changes before settling at age 60 for women and age 65 for men in 1940. It remained at these ages for 70 years.
In 2010, the SPA began rising in stages and will be equalised for men and women at 65 in 2018. It will then increase to 66 in 2020 and 67 in 2028.
In March 2016, the government asked John Cridland to conduct an independent review into options for bringing forward the rise to age 68 and to investigate options for further SPA rises.
