The Government has outlined two options for introducing a mechanism to link the state pension age to life expectancy.
A Department for Work and Pensions green paper unveiled last Monday confirmed plans to introduce a link between the state pension age and longevity.
The paper, A State Pension for the 21st Century, presents two proposals for calculating future increases in the pension age.
The first would involve introducing a formula linked to life expectancy which would mean that increases in life expectancy would automatically adjust the state pension age to reflect rev- isions in projected longevity.
The alternative would be a review at regular, predetermined intervals which would be informed by an independent report to allow life expectancy projections and socio-economic factors to be taken into account.
Speaking to Money Marketing, pensions minister Steve Webb says any reform will contain measures allowing people to lock in to their pension age as they approach retirement. He says the new automatic mechanism will also be used to evaluate planned increases in the state pension age to 67 and 68.
Webb says: “There are two ways to take account of life expectancy. We can look at the micro differences, such as the different life expectancy in Glasgow versus London, for example, or we could ask whichever body does a review to have regard to differences and reflect those differences in the national age.
“We would value feedback on all these things. It is not something I have dogmatic views on and it is a bit of a new issue but we certainly do not want to overcomplicate this.”
Longevity consultancy company Club Vita says the state pension age could be linked to career-average earnings to ensure the poorest in society are not made worse off.
Longevity consultant Steve Baxter says: “Increasing state pension age at the same rate for all disadvantages the poorest, who have shorter life expectancies.
“This is avoidable. One method is to tier state pension age to career-average earnings. As richer individuals live longer, this would better reflect the diver- sity seen in life expectancy.”
Baxter also urges the Government to focus any reform on “healthy” life expectancy. He says: “State pension age increases only improve affordability of the welfare system if individuals are healthy enough to remain in employment, otherwise, state pension is substituted for other benefits.
“The Government should examine the case for linking state pension age to healthy life expectancy to better reflect reality.”
Hargreaves Lansdown pensions analyst Laith Khalaf says people should be able to lock in to a retirement date at least 10 years before they reach it in order to maintain certainty in the pension system. He says: “The notice period is an important factor in this. If we do move to a simplified £140 flat-rate state pension, the benefit is the simplicity for savers. But if you are saying we are going to change the state pension age in line with longevity every year then you are taking that certainty away. There needs to be a decent notice period of at least 10 years so people can make adjustments if necessary.”
Axa Winterthur head of pensions Mike Morrison says the consultation gives the Government an opportunity to take a social policy decision on what proportion of a person’s life should be spent in retirement.
He says: “I think both options are worthy of exploration. Social policy, to some extent, must decide how long it is reasonable for somebody to be in receipt of a pension. In the early 1980s, people were in receipt of the state pension for 25 per cent of their life expectancy, today it is 30 per cent. We need to make a decision about what is reasonable.”