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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

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Who will be left behind you ask……well the 4% who have had their state pension frozen for decades are top of the list. Nothing changes for them as their paid for pensions decrease every year and the cost of living shoots up. So many have now lost so much in cost of living payments the UK must be prepared to receive an influx of destitute seniors returning home who will need health care and housing so instead of saving the economy thousands every year these seniors will be claiming all they are entitled to. All of this unnecessary suffering inflicted on them by governments past and present who have no right to withhold indexing to the 4% just because of where they live.

  2. Trevor Harrington 20th October 2016 at 4:04 pm

    I have written about this many times, and on many internet discussion sites.

    Please take the time to read the Office of National Statistics (ONS) forecasts of life expectancy.

    They categorically DO NOT say that life expectancy is increasing in this country. Indeed, life expectancy has remained virtually unchanged (to within 3 or 4 months) for the last 40 years.

    It is only if you go back and include the years 1900 through to about 1960 that you see any marked changes, and that is hardly surprising, bearing in mind that those years encompass two World Wars and the decidedly unhealthy industries of that time.

    What is in fact happening, is that there are more people living to greater ages than before, but there are also lots more people dying in their ages 60s and 70s, which I surmise is due to the predominance in modern society of substance abuse, and obesity. Neither of these two health problems are likely to be greatly curtailed in the next two or three generations (40 to 60 years).

    The issue is a simple one – the national budget for health and welfare, including state pensions, has been spent by successive Governments (of booth political persuasions) on other things which presumably they believed at the time would assist with their own re-election. Furthermore, with the budget deficit and national debt which we currently have, there is no other place that the Government of the current day can logically hope to cut expenditure in order to resolve them. Indeed, the national budget expenditure on state pensions is bound to increase, as a percentage of Treasury revenue, as the “baby boomers” come through to state pension age.

    The fact is that whilst previous Governments of the last 40 years have utterly failed in their responsibility to pre-plan the demographics of our country, they now have no other realistic option, other than to cut state pensions, if they are going to even hope to balance the budget, let alone repay the national debt.

    However, there is absolutely no reason why, we cannot plan and project a state pension age for all at age 60, and a basic state pension of £200 per week (in todays money), providing the Government face up to and admit their previous failings. It may take 15 or 20 years to get there but it is a perfectly realistic to plan for that age and state pension payment.

    Credit where credit is due – they have at least begun the process by introducing a “lifetime pension fund allowance” some years ago, and then rapidly reducing it to the current £800,000. I would also point out that they are almost certainly about to invent a “super tax” level on all pension incomes in payment which exceed the current maximum expectation of £40,000 per annum pension income (ie £800,000 lifetime fund at 5% or 20 x £40,000pa) – and so they should.

    It would be interesting to know how much of the national debt is in fact attributable to the excessive payments that have been made to public sector pensions which already exceed these figures. I would speculate that such excessive payments are responsible for at least 50% of the national debt and probably a great deal more.

    These excessive pension payments in the Public Sector, are those who are receiving (or think they are going to receive) more than £40,000 per year, or the myriad early retirements for no apparent health reason. We all personally know dozens of them, and collectively across the entire country they are in the hundreds of thousands of people, and each one, even on a simple calculation, can easily cost half a million pounds, often over a million pounds – work it out for yourself.

    If we are going to get back to a reasonable state pension at a reasonable age, the first thing we need to do is to look at the causes of the current problem, and not blame it on the fallacy of an increased life expectancy.

  3. Thankyou Nic Cicutti for your view of the state pension and the possible impact of changes to it and you say that 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.
    What is not mentioned however is the only part of the state pension that is currently decided by the use of discrimination is the policy imposed by section 20 of the Pensions Act which makes a mockery of justice and is nothing less than fraud made legal by the Government in doing so.
    The WASPI campaign seem to be getting the publicity while their position is not discriminative but unfair no doubt to some more than others.
    I would hope that John Cridland is not biassed or wearing blinkers when he makes his final recommendations with regard to the state pension.

  4. What annoys me are these daft statements about people losing out.
    Someone with a lower life expectancy isnt losing anything because they are actually dead !!
    Get real !

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