State Pension Age and the law of diminishing returns

One of the key pension concepts is the State Pension Age (SPA). Many might consider it an outdated concept as longevity has increased but it is still a long-term planning point for many people.

Some people plan to this point to make sure that the money they have saved, plus the state benefit, gives them their required living standard. On the other hand many are just grateful for a point at which they can stop working and then rely on the state for whatever benefits are available.

Over the years I have written a number of times on this and would like to look at it in two parts. In this first article we will look at some of the mechanics that have got us to where we are and in the second part we look at where we go next following the recent Cridland Review.

In the Autumn Statement in 2013, a review was announced to ascertain a framework for drawing the state pension. The key principle was that people should spend, on average, up to one third of their adult lives drawing a state pension, and this assumption should underpin future reviews of the SPA.

Previous research from the Pension Policy Institute (PPI) showed that in 1981, individuals received the state pension for 25% of their adult lives but, with longevity changes, this had increased to 30% by 2000 and to 33% by 2010.

In answer, PPI calculations suggested that, to keep the proportion of adult life in receipt of the state pension at 2010 levels, the SPA would need to be 66.5 by 2030. To keep it at the 2000 level of 30%, the SPA would have to rise to 68 by 2030, and to maintain it at the 1981 level of 25%, the SPA would need to rise to 72 by 2030.

One third seemed to be a logical approach and a number of other assumptions were made. The Government would use 20 as the appropriate starting age and life expectancy figures published by the Office for National Statistics. To even-out the difference in longevity between males and females, weighted figures for the different numbers of men and women in the population would be used.

Another important point was also to give people at least ten years’ notice of a future change to help forward planning.

The Pensions Bill 2013 made provisions for the increase in the SPA to 67 to be brought forward to between 2026 and 2028, then an increase in the SPA to 68 will come into force from the mid-2030s, and a further increase to age 69 will apply from the late 2040s.

The published mechanism gave some objective logic to the issue but has resulted in headlines suggesting we will all be working to age 70 or even 80.

As Pensions Minister Steve Webb was quoted “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.”

The other component to the reform was that the State Pension Age should be periodically reviewed and therefore the Secretary of State must appoint someone to do the review and to report on other relevant factors.

This was done and ex-CBI Head John Cridland has just published his interim report (the findings of which will be discussed in the next part of this article).

Getting state pension reform right is vital – the state pension is a pay-as-you-go scheme, with tax payers paying in and pensioners being paid out. Demographics put it at a point where the number of ‘payers’ is falling and the number of ‘receivers’ is increasing. In such circumstances there are few tools left to Government to address the balance, with SPA being one of the most important.

A few thoughts:

  1. There comes a point where the SPA could be too high to be realistic
  2. It is extremely likely that general taxation will have to increase in the future, both for ‘receivers’ and ‘contributors’.
  3. Could we ever move to a system where the state pension is means tested?
  4. Is the cost of the triple lock sustainable?
  5. (And perhaps a more controversial one) Changes in immigration patterns following Brexit could make the whole situation worse!

I’ll see you in December for the second part of this article where we will look at the Cridland review and some of the associated issues.

Head of Platform Technical

Mike Morrison has worked in financial services for far too many years. In 1990 he joined Winterthur (now AXAWealth) as Technical Manager, playing an instrumental role in the development of their SIPP product and later their pioneering work on income drawdown.

Mike is an ex Chairman of AMPS (the Association of Member Directed Pension Schemes) and is on the Financial Planning Committee of the ICAEW. He is also an Associate of the Pensions Management Institute and the Chartered Insurance Institute, and he holds both an LLB and an LLM in European Law.

An accomplished speaker and writer on financial services matters, Mike is passionate about retirement and savings issues, and how we can better communicate these to a wider audience.

Top