Pensions minister Steve Webb says Government plans to link the state pension age to life expectancy will include a mechanism to give people certainty about their state pension date as they approach retirement.
The Government’s green paper on state pension reform, published on April 4, put forward two options for linking the state pension age to longevity. The first would see the introduction of an automatic formula while the second would involve regular reviews of UK longevity by an independent body.
Speaking to Money Marketing, Liberal Democrat MP Webb sought to allay concerns that removing the set retirement date would leave people with a moving target.
He says: “We are moving into a world where the notion that the state pension age is fixed has got to go, that is implicit in the green paper. Clearly, there has to come a point in your life when you know what your state pension age is going to be.
“The challenge is how far, how fast and on what basis you adjust it prior to that and then at what point in someone’s life you say, regardless of what happens, this is your state pension age. But in my mind, I would assume there would be such a date.”
However, Webb says there will need to be a cultural shift in retirement expectations as the Government seeks to abolish the current system where policymakers set an ad hoc state pension age.
He says: “We need to culturally shift to a view where frankly people recognise we cannot have a definite answer on the question of when they will retire because we do not know what’s going to happen to life expectancy. You will know what ballpark you are in but you won’t know exactly.
“There is a lot of work to do in communicating that idea to the public because the age of 65 is so hard-wired into the nation’s psyche. Getting rid of the default retirement age helps because that iconic 65 is taken out of the system.”
Whichever option the Government chooses will inevitably see an acceleration of the timetable for increasing the state pension age to 67 and 68. Under current plans, the state pension age will rise to 67 in 2036 and to 68 in 2046.
Webb says: “The Secretary of State has already said the timetable for 67 and 68 needs to be reviewed. We could have put the 67 date in the green paper but it would have been a bit odd to say, here is a rational, non-ad-hoc process but here is another date we have plucked from the air’.”
The introduction of a more automatic mechanism for calculating the state pension age was presented alongside options for fundamental reform of the state pension payment. The green paper puts forward two potential reform options. The first is an acceleration of the previous administrations plans, so the state second pension would move to a flat rate by 2020. The second “more radical” option would see the introduction of a single-tier state pension of around £140 at today’s prices for future retirees.
Webb’s comments in opposition suggest he would prefer the more radical proposal but he insists the outcome of the three-month consultation is not a foregone conclusion.
He says: “It would be wrong of me to pre-empt a consultation that’s only just been published. But I think there is a question about whether you go for incremental change or a big bang, because there are aspects of a big bang that have a big impact.
“In opposition, it is easier to be clean cut about it but I think there is a legitimate question about whether to go for incremental change or a big bang.”
Webb has long viewed state pension reform as a cornerstone on which private sector saving can be built. With the intention to simplify the system now clear, his other immediate focus will be ensuring that automatic enrolment and Nest are rolled out as smoothly as possible.
If the Government is successful in this aim, Webb argues that the small businesses its reforms are targeting should not need to take financial advice.
He says: “Our goal is that, particularly with the smallest firms, they will feel able to choose Nest and get on with it and will not feel they need to pay for financial advice.
“A lot of employers we will be dealing with will never have dealt with pensions at all, so we are aiming to make their lives as simple as possible. We want to make sure, particularly through Nest, that it is relatively painless and that they are confident that it is an appropriate thing to do and they can get on with running their business.”
In pursuing its urgent reform agenda the Government has been widely praised for its willingness to listen to the pension industry during consultation. However, in May last year former Labour pensions minister Malcolm Wicks warned Webb of the “deep vested interests” of the industry.
Webb insists throughout these discussions, and in any subsequent policy decisions, that he remains “on the side of the consumer”.
He says: “I see myself very much on the side of the consumer because they are the individuals who elected me. But I think there is a shared interest in quality financial products, so I do not see these things as a battle.
“There are times when my agenda and those of the organised lobby groups do not agree, and that has happened in the last 11 months but very often it has been constructive, collaborative and supportive.”
In opposition, Webb held strong public views on a number of pension issues. He has previously criticised Nest and was a keen promoter of early access to pensions, a policy that the Treasury has recently consulted on.
He says: “I think having a bit of a track record, as my views on certain subjects are well known, actually helps because people know where I stand and we can just get on with it.
“You have always got to be aware of the vested interests but I have not particularly sensed a problem so far.”