Summary
John Cridland has published his interim report on the review of State Pension Age (SPA). The scope of the review is limited to those reaching SPA after April 2028.
Amongst other issues, the review considers the question of whether a universal SPA remains appropriate, or whether some groups should be permitted to draw their State pension earlier, particularly those with reduced life expectancy. We set out further detail below.
Introduction
There are two key components to the legislative requirements surrounding reviews of SPA. First, the Government Actuary’s Department (GAD) must prepare a report to assess whether, on average, a person who reaches SPA within a certain period can be expected to spend the target of a third of his adult life in retirement. Secondly, the Secretary of State must appoint someone to report on other relevant factors that need to be considered as part of the overall Government Review. This current report is the interim report prepared by John Cridland under the second component.
Background
This review considers the future environment that is expected to affect those whose current SPA falls after 2028, so affects baby-boomers and generations X and Y.
The report suggests that the policy objective for the State pension seems to be that individuals should take responsibility for adequacy of income in retirement to suit their own needs and aspirations, with the Government providing an income intended to protect most from poverty.
According to the latest published projections from the Office for Budget Responsibility:
- in 2028, when which SPA reaches 67, State Pension expenditure is projected to be 5.5% of GDP;
- if SPA is linked to longevity, spending rises to 6.7% in the early 2040s;
- if SPA rises as prescribed under current legislation, spending rises to 7.1% in the early 2040s.
Looking across all OECD countries, the average retirement age is set to rise from 64 to 65.5 by 2060. Currently, the highest retirement age is set at 67, though the UK, Ireland and the Czech Republic have legislated to increase SPA to 68. At the other end of the scale, Slovenia and Luxembourg will have a retirement age of 60 by the late 2050s.
The general trend across OECD countries is to limit the ability to take early retirement, mostly through either increasing the years required for eligibility or by increasing the minimum age at which one can take early retirement. In France and Germany, there are possibilities for early access to state pension if someone entered the labour market early.
Three Pillars
The Terms of Reference require the review to consider three key pillars: Affordability, Fairness and Fuller Working Lives.
Regarding affordability, the costs of the system are affected by:
- the policy intention for the State Pension to provide an income above the means-tested level,
- the increase in life expectancy and
- the principle that people should spend up to a third of their adult life receiving the State Pension.
In assessing fairness, the review focusses on intergenerational and intragenerational fairness and on whether the system treats fairly those groups who are likely to be disadvantaged in terms of pension outcomes. If changes are made to SPA, these are likely to have a disproportionate impact on certain groups, such as carers, people with disabilities, the self-employed, ethnic minorities and women. People from these groups tend to have difficulty accruing sufficient private pension savings to provide an adequate income in retirement.
Analysis in the report shows that income inequality is narrowing across the pensioner income distribution and that this continues through the generations. On average across all generations, just over a third of a person’s total pension is made up of private pension. This figure is fairly static across each generation and shows significant reliance on the State Pension as a source of income.
Replacement rates (income in retirement as a proportion of income while working) assume that certain costs will no longer be relevant in retirement, such as housing costs or the care of children. However, it seems likely that mortgages and responsibility for children may apply until much later in life for future generations, calling into question whether the replacement rate will still be a good measure of adequacy in the future.
There are currently 9.8 million workers aged over 50 and 1.2 million aged over 65. Both the number of people in work and the employment rate of men and women above State Pension age have increased. The report notes that people working longer boosts the whole economy, as well as their own financial situation, and this can help make the state pension system more sustainable. It is, however, also worth noting that younger generations appear to start work later overall than preceding generations.
Variable SPA?
Life expectancy has been improving over time, although the rate of improvement has slowed over the last 5 years. Life expectancy differs between regions of the UK, although evidence from the Office for National Statistics shows that variations within geographical areas are larger than regional differences. Socio-economic group also affects life expectancy.
In light of these differences in life expectancy, some commentators have suggested that people should have a SPA based on individual circumstances. However, the report concludes that such an approach is likely to be impractical as well as introducing new issues and new unfairness.
The report suggests possible methods of smoothing the path to retirement for disadvantaged groups:
- early access to the New State Pension after a long working life – for instance, with 50 qualifying years as a benchmark, a person who started work at 16 could become entitled to state pension at 66 rather than at SPA. A variant of this would be to tailor early access to accommodate regional variations in life expectancy or to recognise certain occupations where people have lower life expectancy,
- early access to a reduced pension,
- enhanced working age benefits.
Such policy interventions, however, could add significantly to pension expenditure in the future.