State Pension ages are to be reviewed. Yet, I’m not sure that I have come across something that is, seemingly, so simple yet made so complicated at every step of the way.  It’s not the destination that concerns me, it’s the journey to it.

The History Bit

The 2011 Budget announced the concept of the Single-Tier Pension (that went live from 06 April 2016). At the same time as this reform, the Government announced it would ‘bring forward proposals to manage future changes in the State Pension Age (SPa) more automatically, including the option of a regular independent review’.

Fast forward to Autumn Statement 2013 when the, then, Chancellor George Osborne gave more information. This was governed by the principle that people should expect to spend, on average, ‘up to one third’ of their adult life in receipt of the State Pension.  The Department of Work and Pensions (DWP) then published a ‘background note’ on how such review would work in practice.  A very complicated formula was devised that would look at:

  • Age adult life is deemed to begin (20)
  • Life expectancy

Life expectancy introduces a number of variables, given that women generally live longer than men and expectancy is different in different parts of the United Kingdom.So, the ‘life expectancy’ will be based upon the expectancy figures for both sexes published by the Office for National Statistics but weighted according to the numbers of men and women in the population.

The Formula Bit

To achieve the ‘up to one third’ pledge, the following formula was proposed:

Life expectancy at SPa / (life expectancy at SPa + SPa – adult starting life age)

I am sure that makes perfect sense to everyone!

The Legislation Bit

The concept of a SPa review in every Parliamentary session was inserted into the Pensions Act 2014, with the first review due by 07 May 2017. What I found interesting was that the majority of the 2014 Act related to Great Britain, except the part relating to the 5-yearly review which also extended to Northern Ireland.  Consequently, no provision was necessary in their Pensions Act 2015.

So, and I hope that I have fathomed this out correctly:

  • The review itself is allowed for in legislation that was mainly relating to Great Britain
  • It will be carried out based on a complicated formula devised by the DWP, who only have pensions responsibility in Great Britain
  • However, when it comes to legislating for these in increases, legislation will be different in Great Britain and Northern Ireland (where responsibility lies with the Department for Communities

The Review Itself

On 01 March 2016, the, then Pensions Minister Baroness Ros Altmann announced that John Cridland CBE had been appointed to be the independent reviewer.  Mr Cridland was the former director general at the Confederation of British Industry (CBI).

(Note that the review will not impact the existing State Pension age timetable that is already legislated for up to April 2028. At this time, the SPa will be 67 for men and women.  However, the review may impact the increase that is planned from 67 to 68 between 2044 and 2046, courtesy of the Pensions Act 2007 and Pensions Act (Northern Ireland) 2008.)

On 13 October 2016, Mr Cridland published his Interim Report. At 100 pages long, it is a considered read but one that does impact many, many people.  Here is a summary.

The report starts by suggesting that there are three categories that could be affected:

  1. Baby Boomers (1945 – 1965)
  2. Generation X (1966 – 1979), and
  3. Generation Y (1980 – 2000)

Most likely, it is Generations X and Y that will be impacted. Interestingly, I do not notice any direct reference to the DWP’s 2013 formula.  Instead, Mr Cridland refers to the Review’s terms of reference and specifically questions whether the current system of a universal State Pension age rising in line with life expectancy best supports three key areas.  These seem to indicate a softening in the Government’s approach:

Affordability

This looks at how the State Pension can be maintained for future generations whilst still being funded by an ever-decreasing working population when compared to the number of people receiving the State Pension.

Coupled with this is the fact that the Government has the ‘Triple Lock’ in place that guarantees that the value will increase by at least 2.5% per year.

Fairness

Whether or not the review will recommend an increase to the SPa will also depend on how fair an increase would be looking at the above generation categories. Although the value of the State Pension will be, broadly, similar, it considers the value of private and occupational pensions.  For example, Baby Boomers have less pension benefits than those in the generation before (the Silent Generation).  Generations X and Y are even less fortunate in terms of generous pensions, though Auto-Enrolment has at least increased the number of people saving.

Therefore, Mr Cridland asks, would an increase in SPa that affects X and Y be fair, given that these are the people that will have less to retire on anyway?

Fuller working lives

This section looks at a range of factors that may influence a person’s continuing employment position. It recognises that there is an ageing population that is part-funded by a working population but also says that a significant number of people in receipt of the State Pension do choose to work (though may not contribute to the State Pension because National Insurance for the employee stops at SPa).  Mr Cridland’s report says ‘older people’ are increasingly significant in the labour market, however, there are also a significant number of people that continue to work, possibly because they have to financially.

It can be summarised that there are various circumstances that affect an individual’s ability or inability to work – some live longer, some want to or need to carry on working yet some are incapable because of things such as poor health.

Therefore, the report asks whether any increase in the SPa would impact the opportunity to enjoy a gainful and fuller working life.

In view of all of the above factors, the report is significant in that it suggests that a ‘personalised’ retirement age may be better that a universal default one. Whilst a fixed date gives simplicity and a symbolic point of time at which the person will be able to claim the State Pension, is there a better way?  For example, it asks whether there could be a transition into retirement such as early access to the State Pension after a ‘long working life’ or early access but at a reduced rate.

Mr Cridland says that the guaranteed annual increase and a decreasing working age population is a ‘significant aspect’ in deciding whether the SPa should increase.

Conclusion

This is a very detailed and well-researched report and seems to offer up more questions than it does provide answers. However, as Mr Cridland says, ‘the future of the State Pension age is hugely important’ and, as such, the report is warranted in that it demonstrates that, perhaps, there is a lot more to it than just setting another default age.

Importantly, the reports addresses the important issue of communicating any changes so that people can plan for their retirement. Mr Cridland says that his recommendations will recognise this importance.  He quotes the 2003 report that suggests a minimum of 10 years’ notice for any individuals that may be affected by SPa changes.

Personally, I found this report took a considerable amount of time to read and will take an even longer amount of time to respond to. I do not see an easy answer and wonder of the above three factors will be weighted equally when a final report comes before May 2017.

Note that the consultation is open until 31 December 2016 so please do take the opportunity to express your views. Any research or insights that may help inform the final review and its findings should be E-Mailed to spa.review@dwp.gsi.gov.uk

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