Nic Cicutti: Who will be left behind by state pension reform?

Nic Cicutti

At what age should people be able to retire and still draw a full state pension? This question has resurfaced following an interim review into the state pension age by former CBI director general John Cridland, published last week.

The report does not formally suggest any particular date; for that we will have to wait until the full one in another few months’ time. But there are already intriguing hints that elements of it may not go precisely in the direction envisaged by many experts when Cridland first began his work in March.

Back then, the Financial Times quoted Hargreaves Lansdown head of retirement policy Tom McPhail as saying: “Those joining the workforce today are likely to find themselves waiting until their mid-70s to get a payout from the state system. This is simply a function of the big jumps we continue to see in life expectancy, which the state pension cannot hope to support without costs spiralling out of control.”

Notwithstanding McPhail’s comment so, the paper also quoted government sources as saying the report itself did not intend to revisit the current timetable, which takes us up to 2028 and envisages a joint retirement age of 67 for both men and women. This is confirmed by Cridland himself in this report.

It seems the issue up for discussion is that of when to raise the state pension age one step further from 67 to 68 – a move originally slated to start in April 2044 and to complete two years later.

Cridland’s interim report appears to be looking at the raising of the state pension age through a slightly different prism. Although he focuses, as expected, on the long-term financial cost of the keeping the state pension age in its current form, he also focuses on the impact of increasing it for different social classes.

One of the striking graphics in the report is its chart of life expectancy depending on where people live on transport maps. In London, for example, if you live near Gloucester Road tube station on the District Line your life expectancy is 88. In Ravenscourt Park, just a few stops along, it will be 74.9.

Gloucester Road is a highly affluent area in the Borough of Royal Kensington and Chelsea. Ravenscourt Park, although becoming more gentrified as a result of rising house prices in the capital, remains one of the poorer areas in Hammersmith and Fulham, with crime figures consistently higher than the London average across all types of offences.

Similarly, the tram network in Manchester indicates an average life expectancy of 85.6 in the city centre area of Deansgate-Castlefield, compared with Newton Heath working-class council estates’ average of 70.4 years.

The problem is that any reform of the pension system that attempts to understand – and respond to – more limited longevity caused by the impact of social class is always bound to collide with cost considerations.

The report makes the point that by 2028, when the state pension age reaches 67, spending on it will reach 5.5 per cent of GDP: about what we are spending now. By the early 2040s, this will reach 6.7 per cent, or 7.1 per cent if the triple lock – where the state pension rises every year by the highest of price inflation, earnings growth or 2.5 per cent – remains in place.

The implication of the report seems to be that you can keep the triple lock but, in that case, the state retirement age will need to be raised to 68 far more quickly than the original two-year aim of doing so by 2046. Or you can scrap the triple lock and any raising of the state pension age can be more gradual.

The difficulty for Cridland is that pesky one of social class. He knows (and his report shows) the triple lock has had a disproportionately positive impact on working-class people. According to The Pensions Advisory Service in April 2014, the basic state pension was around £440 a year higher than it would have been if it had just been increased in line with the rise in average earnings.

That extra £8.50 a week clearly matters far more to someone surviving on a basic state pension and not much else than someone with a financially healthier combination of state and occupational or personal pension schemes.

Which brings us to the issue of how to ensure those likely to be the worst-affected by a raising of state pension ages or the abandonment of the triple lock are not left behind.

Former pensions minister Ros Altmann’s suggestion is that a full state pension should be based on 45 years of working life instead of the current 35, with those wishing to stop work earlier being allowed to take a proportion of their pension.

Whatever the solution, one of the powerful aspects of Cridland’s work is that, for the first time, there is an acknowledgement that a standard state pension age for all is an increasingly unfair option if you are simply planning to raise the retirement age beyond the current limit. Having uncorked the genie from the bottle it will be far more difficult for the Government to shove him back in.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk Follow him on twitter @NicCicutti