Iain McLellan, deputy chair of the Pensions Board of the Institute and Faculty of Actuaries (IFoA), looks at the profession’s response to the recent call for evidence as part of the state pension age review.
This summer, in addition to establishing a new Pensions Commission, the government also announced the launch of the third review of the state pension age.
This review will consider whether the current rules around the state pension age are appropriate, based on two reports. The first is an independent report, led by Dr Suzy Morrissey, on specified factors relevant to the review. The second report is from the Government Actuary’s Department, to examine the latest life expectancy projections data.
As the terms of her review are limited to only the state pension age, I can appreciate the difficulty of the task that Dr Morrissey has been set. Given the various design elements of the state pension, it always feels odd that these reviews only consider one of the main features rather than all of them. It is the equivalent of asking her to transform a symphony orchestra’s sound but only letting her tune one violin.
The IFoA has recently responded to the government’s call for evidence on the state pension age. This considered factors such as linking pension age to life expectancy and the overall sustainability of the system.
Focusing on the areas set out in the call for evidence, the key points we highlighted were:
- Rising life expectancy and an ageing population increase pension costs, compounded by the current triple lock policy. However, life expectancy alone should not dictate the state pension age; the income needs of individuals arising from age-related declines in health must also be considered.
- The state pension age should reflect the core role of the state pension. We believe this should provide a predictable foundational income to avoid poverty in older age. This universality supports private saving and avoids any stigma associated with means-testing.
- Longevity gains are concentrated among affluent groups, while deprived groups face shorter lives and poorer health. A uniform state pension age increases the risk of deepening inequalities. Life expectancy at birth varies by up to 10 years between socioeconomic groups, and the impact of poor health on the ability to work also varies widely between different groups.
- Without adjustments to the state pension age, younger generations bear heavier tax burdens as dependency ratios worsen. Yet automatic state pension age rises could penalise those who most need a retirement income. Fairness requires balancing sustainability with equitable retirement outcomes over the long term.
- The state pension age is a key lever for cost control, but it should not be the sole mechanism. The triple lock is fiscally unsustainable in the long term, as it guarantees real-term increases beyond both prices and earnings. We advocate replacing it with a transparent, predictable approach that would build confidence in the future of the state pension age by having, for example, the state pension target a set proportion of median earnings.
- We are not in favour of formulaic age changes tied to life expectancy, given the uncertainty and impacts on disadvantaged groups that an overly simple mechanism may cause.
In summary, while we are not against reflecting increasing life expectancy in the state pension age, we believe the state pension system should be regularly reviewed in the round, considering multiple factors such as health, work capacity, socioeconomic disparities, dependency ratios, and fiscal constraints.
Iain McLellan is deputy chair of the Pensions Board of the Institute and Faculty of Actuaries.
