When is an increase in State Pension Age not an increase in State Pension Age? When it is announced by a Government that doesn’t have a majority.
If you watched the news or read the ‘papers on 19 July (and got past the coverage of how much BBC stars are paid) you can’t have missed the apparent announcement that State Pension Age will increase faster than previously planned.
This blog is about the background to this announcement, how changes to State Pension Age might affect you but also about why the Government, despite all the coverage suggesting otherwise, did not really change anything at all. Yet.
What is State Pension Age?
To start with the basics – State Pension Age is the age when your state pension benefits become payable.
It is not your retirement age – you can carry on working beyond State Pension Age if you enjoy your job or you can retire before State Pension Age if you want to and can afford to.
However State Pension Age can play a significant role in decisions about when you retire because (1) many people may not be able to afford to retire until their state pension becomes payable and (2) pension age, and hence the level of benefit payable at any given age, for millions of public sector workers is linked to State Pension Age.
So for many people an increase in State Pension Age may indirectly result in them having to work longer.
Broadly speaking, under the current timetable, State Pension Age will be equal at 65 for men and women by November 2018; it will be 66 for both by October 2020, 67 by April 2028 and 68 by April 2046.
Background to State Pension Age review
There has been broad political consensus that State Pension Age has to increase as longevity improves. Previously this has been on an ad hoc basis with legislation increasing State Pension Age in 2007 (increase to 66, 67 and 68), 2011 (increase to 65 for women and to 66 for both men and women brought forward) and 2014 (brought forward the increase to 67).
In the 2013 Autumn Statement the Chancellor announced that State Pension Age will be reviewed every Parliament under the principle that people should expect to spend “up to one third of their adult life” over State Pension Age.
DWP published a background note stating that “our working assumption is that this methodology would provide for SPa to complete any increase in the year in which the proportion of adult life spent in receipt of State Pension at the existing SPa would have reached 33.3% (to the nearest decimal place)”.
The Office for Budget Responsibility (OBR) published long-term forecasts in July 2014 based on this assumption (and the latest available – 2012 based – population projections at the time) that showed State Pension Age rising to 68 by 2036, 69 by 2049 and 70 by 2063.
Section 27 of the Pensions Act 2014 formally legislated for the State Pension Age review.
The first State Pension Age review
The announcement of 19 July was the formal outcome of the first State Pension age review under the Pensions Act 2014.
One thing to note is that it was late – the Act required the report by 7 May 2017 but it was not published until 19 July. Obviously the Act did not foresee the snap general election.
But there were lots of interesting things going on in the background…
The population projections underpinning the review were more recent - 2014 based projections – than for the OBR’s 2014 fiscal report. While the underlying mortality data continued to improve between the 2012 based projections (published in 2013) and the 2014-based projections (published in 2015) the rate of improvement was lower than expected.
The impact of this can be seen in the OBR long-term forecasts published in January 2017 (they were delayed because of Brexit). By allowing for the 2014-based population projections the estimated date when State Pension Age rises to 68 was put back 5 years to 2041 and State Pension Age reached 69 in 2055 and was not projected to reach 70 at all within the forecast period.
So relatively small changes in mortality assumptions can have a big impact on State Pension Age changes.
As part of the review the Government commissioned two reports:
- One from the Government Actuary that looked at what State Pension Age should be under the principles set by Government (a more thorough version of what the OBR had done).
- A second report from an independent reviewer (the Government appointed John Cridland) to look at other factors that are relevant to decisions about State Pension Age.
And here is where it starts to get a bit more interesting … Government tried to get away with shifting the goalposts.
Appendix A of the Government Actuary’s report sets out the terms of reference the Government set. These asked the Government Actuary to produce figures on the basis of 33.3% of adult life spent over State Pension Age but also for 32%.
This new basis does not sound very different to that originally announced but it could have a huge impact. Based on a target of 32%, the age State Pension Age reaches 68 is brought forward 11 years to 2030; 69 is reached 13 years sooner by 2042 and 70 by 2056.
Quite a change due to such a small tweak to the terms of reference.
The report by John Cridland is very interesting and goes into a lot of very relevant issues but I want to focus on the major recommendation: that State Pension Age should increase from 67 to 68 between 2037 and 2039 (ie the increase should be brought forward 7 years compared to the existing schedule).
John Cridland spent part of his report considering what the appropriate target proportion of adult life over State Pension Age should be. He concluded that the average over the last decade – 32.87% - was a fair and balanced starting point. This target resulted in his recommendation of increasing State Pension Age to 68 by April 2039.
What to do with these reports?
In March 2017 Government had the reports it commissioned from the Government Actuary and John Cridland and had to decide how to respond.
To summarise the information above:
- George Osborne first announced a target of up to one third of adult life over State Pension Age and, based on the latest population projections then available, this implied State Pension Age would reach 68 by April 2036.
- Updated population projections underpinned the Government Actuary’s report and lower than expected mortality improvements meant that, based on a target of 33.3% of adult life over State Pension Age, the increase to 68 would happen by April 2041.
- But based on a new target of 32%, State Pension Age would increase to 68 as soon as April 2030.
- Considering the issue in the round, John Cridland felt that the average proportion over the past decade, 32.87%, was the most appropriate target and State Pension Age would reach 68 by April 2039 on this basis.
So both the mortality assumptions underpinning the population projections and the target percentage of adult life spend over State Pension Age can have a significant impact on the outcome of the review. One is subject to a great deal of uncertainty, the other is a choice.
So what was Government to do with these reports?
Nothing would have been a good option!
That’s a serious suggestion.
Prospect’s general secretary wrote to the Secretary of State for Work and Pensions shortly after he was appointed following the general election. The letter explained that no decision is necessary for some years and that delaying a decision would mean that further population projections could be taken into account which would remove a lot of the uncertainty involved.
And the surprising news is that nothing is pretty much what the Government did!
Outcome of the first State Pension Age review
The press coverage focussed on the announcement that Government agreed with John Cridland’s recommendation to bring the increase in State Pension Age to April 2039.
But Government actually only committed to carrying out another review before making any changes. There would be no legislation to implement any further increase to State Pension Age for now.
This is exactly what Prospect called for.
Under the Pensions Act 2014 the next review of State Pension Age must be completed by 2023.
By then there would be up to three further sets of population projections to base decisions on and still plenty of notice for potential changes in the late 2030s.
There could also be a different Government with different views about State Pension Age changes.
The sting in the tail
The real outcome of the State Pension Age review was for Government to put off any action until after a further review when more mortality data will be available.
This was what Prospect called for so that is welcome, right?
Yes but there was also some goalpost shifting that could have major significance.
The report by the Secretary of State said that: “Government is minded to commit to ‘up to 32%’ as the right proportion of adult life spent in receipt of State Pension”.
Remember that when George Osborne first announced the policy the proportion was “up to one third”.
It may not sound like much of a difference but if Government made this change at the next review then State Pension Age could increase dramatically - to 69 by April 2042 and 70 by April 2056.
This is something that needs far more scrutiny and debate than it has received so far because it could have far reaching implications for millions of people. Watch this space.