The state pension age should be linked to life expectancy, but with a guaranteed minimum payout for those with shorter life expectancies.
Consultancy group LCP set out the proposal in a new paper responding to the review of the UK’s state pension age, co-authored by partners Steve Webb and Stuart McDonald.
The authors argued that the length of modern retirements was “a historical anomaly” created by a century of rising life expectancy without equivalent increases in the state pension age.
Suzy Morrissey, deputy director of the Pensions Policy Institute, was appointed to lead the review of the state pension age in July. The review formally launched in August.
“The case for increasing state pension ages is strong, but it has always been hard to do so in a way that is fair to people in more deprived areas.”
Steve Webb, LCP
McDonald and Webb recommended a new framework under which people would spend an average of 20 years in retirement, with the state pension age rising by roughly one year each decade. The approach, they said, would make the system more sustainable while giving individuals clearer expectations about when they will retire.
To address fairness concerns, particularly in areas with lower life expectancy such as Blackpool or Glasgow, LCP has proposed a “guarantee period” similar to that used in private-sector annuities. Anyone reaching state pension age would be guaranteed at least five years of payments, with any balance paid to their estate if they die earlier.
McDonald said: “Life expectancy in the UK for young adults rose by 17 years during the 20th century, but state pension age did not increase at all. As a result, we now have historically long retirements, which will inevitably prove fiscally unsustainable.
“A new approach is needed. We recommend setting pension ages on the basis that the average person can expect a fixed number of years in retirement. This will help the system to catch up with the dramatic improvements in life expectancies which we have seen, and will be fairer to current and future people of working age, whose contributions are used to pay the pensions of retirees.”
Webb added: “The case for increasing state pension ages is strong, but it has always been hard to do so in a way that is fair to people in more deprived areas who cannot expect to draw a pension for as long. Our proposal for a guaranteed minimum payout period of five years represents a ‘something for something’ reform.”
The proposals come as the government launches its third statutory review of the state pension age alongside the revived Pensions Commission, tasked with assessing long-term adequacy and affordability across both state and private provision.
