Fit for retirement?

The last week in March saw no less than three reports on the state pension age (SPA).

The Government Actuary (GAD) focussed on the ratio between workers paying taxes and pensioners benefiting from them. Baroness Lucy Neville-Rolfe came up with a formula to prevent future workers being over-burdened by the cost of paying for pensions, while the DWP reported that it would sit on the fence and leave decisions on changing the state pension age to the next Government.

This might sound like a “no news” story, but the reports arrived in a week when twenty somethings were rioting in France over Emanuel Macron’s plan to push back its state pension age from 62 to 64. The “news” that there was to be no immediate change in the UK state pension age was well received by the Labour party but roundly criticised by Jacob Rees-Mogg who told the Daily Express that the SPA should be 72 to align with Beveridge’s original conception.

The SPA reminds me of the push me pull you, Hugh Lofting’s creation that had heads at either end of the body that pulled in opposite directions. The Rees Mogg end of the animal listened to GAD while the other end may have been spooked by France but more likely by the impact of an unpopular policy on the result of an impending general election. “Now is not the time” said DWP Secretary,  Mel Stride but while he delayed a decision, he hasn’t stifled debate.

So what is the data telling us. Well, it too is “push-me-pull-you”. GAD is pessimistic

The differences in the growth of the pensioner population and that of the working-age population has a demographic impact. There were 280 pensioners for every 1000 people of working age as of 2020. This will increase rapidly from the 2030s and will reach levels never seen before by 2070, where the ratio is projected to be 393 pensioners per 1,000 people of working age

But other actuaries are focussing on a slowing down in improving life expectancy. Last week their Continuous Mortality investigation study found that life expectancy assumptions at retirement age are likely to fall by around 6 months, reducing our pension expectations by 2% – that’s a lot less stressful to the Treasury than expected.

So, what does this mean to future pensioners and those drawing their state pension today?

GAD reckons that maintaining the current state pension age timetable with the current retirement age of 66 increasing to 67 from 2026-28 and to 68 from 2044-46 will see pensions absorb 8.1% of GDP – well above the 6% target.

But our expectations of retirement are seeing more of us winding down in our 50s. Lucy Neville-Rolfe suggests that those worn out, might be allowed to take a reduced state pension (with 4% pa reductions anticipated) from 65. Baroness Altmann has suggested that the state pension age might be determined by health , wealth or even postcode , conflating aspects of the state pension with the means testing of pension credit.

Those who advocate pushing back the state pension age point to the much higher ownership of workplace pensions as a result of auto-enrolment. For those with small pots, private provision could provide a bridge to the point when a deferred but potentially larger state pension would become available. For those lucky enough to have a large pot or a wage for life DB pension, then the budgetary announcements on increased annual allowances and the scrapping of the lifetime allowance suggest that state support for private pension provision is undiminished.

The frontline of the debate looks to be the state pension age. Pensions has enjoyed a quarter of a century where a cross-party consensus has prevailed on how the public purse is deployed. That consensus looks to be disappearing as the left look to strengthen the state system by normalising current expectations or even increasing early retirement options. The right is looking to spend the public purse on incentivising private pensions. The debate is reverting to the polarised positions of the 1990s which saw the introduction of personal pensions, and the decline of SERPS encouraging the right while the left fought for an improved state pension and support for occupational schemes.

The debate may not be as polarised as it is in France (or Spain) but it is likely to remain a febrile one in the years to come.