Steve Webb: State pension review points to radical reform

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The most surprising thing about the Government’s review of the state pension age was not the fact it is taking place but rather the variety of ingenious ideas for reform floated at the same time.

The backdrop to the announcement is the 2014 Pension Act, which required there to be a review of the state pension age once every five years, with any recommendations requiring the approval of Parliament before coming into force.

Although it was not written into the letter of the law, the basic principle set out when the Act was going through Parliament was the review would look at the pension age needed for each generation so people would, on average, spend two-thirds of their adult life in work and one third in retirement.

So, for example, if people were now predicted to live one year longer on average than previously expected, then the review might recommend an increase of eight months in their pension age.

The terms of reference for this first review do not even take this principle for granted. Rather, they say the review must consider “…whether the current system of a universal state pension age rising in line with life expectancy best supports affordability, fairness and fuller working lives objectives”.

It may be the Government is thinking of moving to a slower timetable for raising pension ages, perhaps scarred by the recent experience of the rapid increase for women.

But an alternative reading would be the Treasury thinks increasing pension age by just eight months is too gentle if people are living for another year. It could be hoping for a year-for-year increase in line with practice in some Scandinavian countries.

Even more intriguing, though, is the review will look at “variations between groups”, presumably in terms of working lives and life expectancies. While this much was already assumed, the comments by ministers as the review was launched hinted at some very interesting ideas.

One was pension ages might vary by postcode, reflecting differences in longevity. Indeed, such a process already operates in the annuity market, so it would not be wholly unprecedented. But it is hard to see how this could work in a state pension system.

The other idea was those who left school and went straight to work and contributed solidly might draw their state pension earlier than graduates and others who started work later.

On average, it might be non-graduates are more likely to be doing physically demanding jobs and so perhaps “deserve” to draw a state pension sooner. However, one can immediately think of many anomalies such a distinction will create and I have my doubts as to whether it would be practical.

One final observation. The media discussion of the review conflated the state pension age with the date at which people can afford to stop work. What is very clear is, unless we can do something about levels of pension saving, the state pension age will be no more than a landmark people pass as they work on for years beyond in order to build up a decent income for their old age.

Steve Webb is director of policy at Royal London