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Lower life expectancies and the State Pension Age review

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By David Robbins | August 5, 2022

A flexible review process means that gloomier mortality projections need not keep the State Pension Age ‘lower for longer’.

In 2014, Parliament legislated to increase the State Pension Age from 66 to 67, with the change phased in between 2026 and 2028. It also required the Government to review the State Pension Age by May 2017 and at least every six years thereafter, having regard to life expectancy and to other relevant factors. The first review pencilled in a rise to 68 that would begin in 2037 and be completed in 2039. The second review is under way and must conclude by 7 May 2023.

Lower life expectancy projections are unlikely to delay the rise to 67 in 2028

People turning 67 in 2028 are now projected to live almost three years less long, on average, than they were when the 2014 legislation was passed (3.0 years less for women and 2.6 years for men) 1.

Nevertheless, the current review seems likely to treat the already-legislated-for rise to 67 as a done deal, just as the previous review did. HM Treasury will not want to pay pensions to more than 800,000 66-year-olds in each year that the change is postponed, and it would take a considerable clamour, of which there are currently few signs, to persuade ministers to make this a priority use of resources. (They will also want to anticipate what public attitudes might be at the next general election, when the change could be just around the corner.)

Assuming that “67 in 2028” remains on the statute book, opposition parties will need to decide whether to differentiate themselves from the Government by offering people approaching age 66 up to a year’s worth of State Pension at the expense of taxpayers in general. Labour’s 2019 manifesto promised to keep the State Pension Age at 66, but this position has not been reaffirmed under Sir Keir Starmer’s leadership.

The rise to 68 – DWP keeps its cards close to its chest …

At each review, ministers must obtain a report from the Government Actuary on “whether…a person who reaches pensionable age within a specified period can be expected to spend a specified proportion of his or her adult life in retirement, and if not, ways in which the rules might be changed with a view to achieving that result” 2.

The Department for Work and Pensions recently confirmed to WTW that this report has been commissioned. However, it rejected our Freedom of Information request asking what calculations the Government Actuary has been tasked with carrying out, on the grounds that “the information is intended for publication at a future date”. This departs from the approach taken at the previous review, when the letter to the Government Actuary was published on the day it was sent3.

If the DWP had disclosed what “proportion of adult life in retirement” it specified, we could have told you what this implies for when the State Pension Age would need to reach 68.

A flexible formula: how “up to 33.3% of adult life in retirement” became “up to 32%”

Proposals to require periodic reviews were first announced in 2013. These included a “core principle” that the State Pension Age should start rising two years before the average proportion of life after age 20 in receipt of State Pensions would otherwise reach 33.3% for newly retired pensioners, unless ministers chose to override the algorithm. A one-year increase would then be phased in over two years4. (Note: this formula can only increase the age at which someone becomes eligible to claim State Pension, not reduce it.)

At the first review, these goalposts started to move. An alternative scenario was modelled: the State Pension Age would start rising before the average proportion of adult life in receipt of State Pensions reached 32%. Under the life expectancy projections then in use, a 32% trigger for increases would have seen the State Pension Age reach 68 in 20305. Like the rise to 67 in 2028, this would have had the advantage, from the Exchequer’s perspective, of delaying payment of State Pension to some large cohorts of retirees: birth rates were high in the 1960s, with 1964 seeing the second largest number of live births in England & Wales during the last hundred years.

A general election was held in June 2017, which led to the deadline for completing the first State Pension Age review being missed by a few weeks. More significantly, a Government which had just lost its House of Commons majority was in no position to impose a rapid increase for which it had not prepared the ground. Instead, ministers endorsed reaching 68 in 2039, two years sooner than if they had followed the original 33.3% formula. This timetable had been recommended by John Cridland, author of a report6 into “other specified factors” that legislation requires ministers to commission to complement the Government Actuary’s findings. The Government did, however, announce that it “will aim for ‘up to 32%’ in the long run …”7.

“Up to 32%” now implies 68 in 2056. But for a different answer, ministers can change the question

Plugging the ONS’s latest, gloomier, mortality projections into the “up to 32%” formula would point to the State Pension Age reaching 68 in 2056 – the year in which it was expected to hit 70 when the Government made “up to 32%” the long-term goal. Moreover, these ONS projections predate indications from the 2021 Census that old-age mortality has been heavier than thought over the past decade, which could make projected future mortality rates heavier too – as highlighted by WTW’s Stephen Caine in a recent blog. The ONS intends to publish a new set of projections in 20238, but that may not be in time to feed into the current review.

If policymakers do not like “State Pension Age should provisionally reach 68 in 2056 (or possibly later after adjusting for the Census)” as an answer, they can change the question. Indeed, they may already have done so in that unpublished letter to the Government Actuary.

Seemingly innocuous tweaks to the “percentage of adult life in retirement” used in the formula make a big difference to when the State Pension Age would have to rise. Under the latest ONS projections, increasing State Pension Age before the average percentage of adult life in receipt of State Pensions hits 31% rather than 32% would bring the increase to 68 forward by 12 years, to 20449. Setting the trigger at 30% would see State Pension Age reach 68 in 2033.

The justification offered for a 32% trigger in 2017 would now support something close to 31%: people who retired in the recent past are now expected to live less long on average than they were, so a lower percentage of adult life above State Pension Age is needed to mirror their experience10. The Government could always use a different historical comparison to support a faster increase in State Pension Age, but it might prefer to use completely different arguments – for example, that borrowing during the pandemic has affected what is affordable.

Instead of cutting the “percentage of adult life in retirement”, ministers could change the metric

A second report to inform the review is being prepared by Baroness Neville Rolfe. She has been asked to “explore what metrics government should take into account” and “whether it remains right for there to be a fixed proportion of adult life [that] people should, on average, expect to spend over State Pension Age”. This might indicate that the Government is shaping up to retire the “percentage of adult life in retirement” calculation, rather than just specify a lower percentage11.

One alternative objective would be to stabilise the average number of years above State Pension Age, which is broadly consistent with increasing the State Pension Age by one year each decade. Or policy could focus on factors such as the ratio of pensioners to working age people (which will be affected by longevity but also by fertility rates and migration), or State Pension spending as a share of national income (which the Office for Budget Responsibility projects will rise from 4.9% in 2031 to 5.5% in 2041 and 6.2% in 2051, on the assumption that State Pension Age reaches 68 in 2039 and stays there until 2071) 12. The Government might also want to send a signal about encouraging longer working lives, where health permits, particularly when economic inactivity amongst over-50s has recently risen after a long period when it was trending down13.

Changing the Prime Minister during the review

This review was kicked off by Boris Johnson’s administration and will conclude under a different Prime Minister. At the time of writing, I am not aware of either of the two remaining candidates for the Conservative leadership mentioning the State Pension Age review during this race. Both contenders have set out plans to reduce taxes; all else equal, that may predispose them towards constraining demographic pressure on Government spending.

In 2009, Liz Truss co-authored a pamphlet14 which called for the State Pension Age to reach 68 in 2015-16 for men and in 2017-18 for women; but that before she was an MP, never mind a prospective PM.

The review is about “from when?”, not “how much?” or “to whom?”

Baroness Neville Rolfe’s terms of reference say that her report should cover “the future affordability and sustainability of the State Pension” but not “questions related to the structure of State Pension including, for example, how State Pension is uprated”. The starting point for this review will therefore be to treat the levels of State Pension and qualifying conditions as a given and to consider what State Pension Age is appropriate in this context.

In practice, there are trade-offs in State Pension design: the Government could pay a higher pension from a later age (which would benefit those who live longer) or a lower pension from a younger age (which may be better for those who die sooner). It may or may not bundle an announcement on State Pension Age together with one on the future of the Triple Lock (which, unlike the State Pension Age review, affects existing pensioners); currently, the Government is only committed to maintaining the Triple Lock until the end of this Parliament.

Notice periods and simplicity versus fairness

The review also provides an opportunity to revisit how increases should be implemented. For example:

  • Since 2013, policy has been that people affected by any change to State Pension Age should be given at least 10 years’ notice. Confining changes to people some way from retirement can dull public opposition – a big plus for elected leaders. But longevity expectations and the economic context can change a lot in that time, as can expected outcomes from the defined contribution savings that people will increasingly rely on to supplement State Pension income. Baroness Neville Rolfe’s call for evidence put this notice period on the agenda.
  • Cramming each increase into a short period means that most people become eligible to claim their State Pension on a particular birthday. This is more comprehensible but at the cost of treating similar people differently; people born on 6 March 1961 have a State Pension Age one year older than people born on 5 April 1960 despite only being expected to live about a month longer on average. The Government could consider whether a slow but continuous increase that resembled a slope rather than a staircase would be fairer and/or help entrench the idea that it is normal for retirement ages to go up. Any change to the mechanism is unlikely to affect the rise to 67 if the Government does not want to revisit that more broadly.

Potential consequences for private pensions legislation

Under the law as it stands, the State Pension Age will not reach 68 until 2046: in 2017, the Government said it would hold off legislating until after the 2022-23 review. If the current review concludes that State Pension Age should reach 68 before 2046, the Government will have to decide whether to legislate now, to wait until after the next general election, or to wait until the next review (which need not conclude until 2029).

Because Parliamentary time is scarce, it can be more efficient to have a single Pensions Bill than separate Bills for different initiatives – so the timing of legislation to change the State Pension Age may affect when Parliament approves changes to automatic enrolment rules (unless a private member’s Bill15 which would reduce the age threshold to 18 and remove the lower qualifying earnings threshold, at dates of the Government’s choosing, makes it onto the statute book), and the introduction of a permanent regulatory regime for defined benefit superfunds.

Footnotes

1 This compares cohort life expectancy (a measure that allows for projected improvements in mortality rates) at age 67 in 2028 under the ONS’s principal 2012-based UK population projections and its interim 2020-based projections. Female life expectancy at 67 in 2028 has fallen from 23.8 years to 20.8 years; male life expectancy at 67 in 2028 has fallen from 21.3 years to 18.7 years. See ONS life expectancy projections.

2 This requirement is in s27 of the Pensions Act 2014. The state of being “in retirement” appears to refer to eligibility to receive State Pension, not to whether the individual has retired from work.

3 A letter from Richard Harrington, the pensions minister at the time, to the Government Actuary was dated 16 November 2016 and was published on the Government website on the same day.

4 See the background note published by the DWP alongside the 2013 Autumn Statement.

5 Periodic review of rules about State Pension Age: Report by the Government Actuary (March 2017).

6 Independent Review of State Pension Age: Smoothing the Transition (March 2017).

7 State Pension age review, DWP, July 2017, page 4. The Government has consistently used the labels “up to one third” and “up to 32%”. Although we quote this language here, “up to” is a misnomer: because the formula sees State Pension Age rise before the proportion of adult life during which new retirees could on average expect to receive State Pensions would otherwise reach 33.3% or 32%, there would be no cohort of retirees for which the average is this high. (Of course, there will be individuals who spend a larger proportion of their adult life in receipt of State Pensions – the formula deals in averages rather than aiming to cap individual retirement lengths.)

8 See the January 2022 statistical bulletin on the interim 2020-based projections. In 2021, an ONS update indicated that publication would be in “early 2023”.

9 An argument that the Government used in 2017 to support a 32% trigger would now support setting the trigger at around 31%. In 2017, the Government said: “Under a 32% scenario, the average proportion of adult life that people reaching State Pension age between 2028 and 2060 would be expected to spend above State Pension age would be 31.3%. This is similar to the average proportion of adult life that people reaching age 65 (male State Pension age) over the last 25 years (between 1992 and 2016) were expected to spend above age 65.” (It appears that this calculation gave equal weight to each year’s retirees as a group, rather than to each individual over the 25-year period.) Heavier mortality, both actual and projected, reduces the 31.3% number to around 30.2% for people who were 65 between 1992 and 2016. A target of “up to 31%” would give a similar average percentage of adult life above State Pension Age for people reaching State Pension Age between 2028 and 2060. If the Government wanted to argue for a lower trigger, and therefore for a faster rise to 68, it could make this sort of comparison over a different time period. But it might prefer to use different arguments, such as the change in the fiscal position in the wake of COVID-19.

10 In 2017, the Government said: “Under a 32% scenario, the average proportion of adult life that people reaching State Pension age between 2028 and 2060 would be expected to spend above State Pension age would be 31.3%. This is similar to the average proportion of adult life that people reaching age 65 (male State Pension age) over the last 25 years (between 1992 and 2016) were expected to spend above age 65.” Heavier mortality, both actual and projected, reduces the 31.3% number to around 30.2%. A target of “up to 31%” would now give a similar average percentage of adult life above State Pension Age for people reaching State Pension Age between 2028 and 2060.

11 Parliament would have to change legislation to stop the calculation from feeding into each periodic review, but the Government is free to de-emphasise it. Relatedly, a call for evidence issued by Baroness Neville Rolfe asked, “How can we best take into account the sensitivity of the life expectancy projections…?” This underlines a core challenge with trying the link State Pension Age to longevity: mortality rates projected decades into the future are bound to be wrong and a policy that relies on them puts power in the hands of the assumption-setters; but only using observed mortality rates means ignoring reasons to believe that the future will be different from the recent past. Of course, this issue would also arise if State Pension Age were adjusted based on other targets such as number of years in retirement or pensioner to worker ratios.

12 Fiscal risks and sustainability report 2022, OBR July 2022, table 4.9.

13 See Decisions to retire early are driving growing economic inactivity among people in their 50s and 60s, by Bee Boileau and Jonathan Cribb, Institute for Fiscal Studies (June 2002).

14 Back to Black: Budget 2009 paper, by Dale Bassett, Professor Nick Bosanquet, Andrew Haldenby, Patrick Nolan, Lucy Parsons, Laurie Thraves and Elizabeth Truss, Reform, April 2009, page 24.

15 The Pensions (Extension of Automatic Enrolment) Bill has been proposed by Richard Holden, a backbench Conservative MP.

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