Could you be affected by an increase in State Pension Age?

Following recent speculation in the press (see here or here) about a possible future increase in State Pension Age, Neil Walsh, Prospect pensions officer, looks at why these changes might happen, who might be affected and what the impact might be.

Why is State Pension Age important?

State Pension Age affects every Prospect and Bectu member, though its impact can vary.

Its main effect is through eligibility to receive state pension benefits. These are only payable from State Pension Age (unlike personal or occupational pensions, there is no option to draw them early, though you can choose to defer taking them until later).

For information: a full state pension (which most Prospect and Bectu members will qualify for) is currently £185.15 per week (it will increase to £203.85 per week from April 2023). (You can get a forecast of your state pension entitlement from here.)

For many members, the age at which they can start to receive state pension is hugely important because they may not have enough savings to afford to retire until the state pension is payable.

Other members are fortunate enough to have enough pension savings to afford to retire before the state pension becomes payable. For them, an increase in State Pension Age will have a detrimental financial impact, but not necessarily impact their retirement plans.

Other social security benefits, besides state pension, are linked to State Pension Age.

There is also a link between State Pension Age and the Normal Pension Age in most public service pension schemes (which means changes in State Pension Age affect the value of accruals in public service pension schemes as well as when people can receive state pension.)

What is State Pension Age currently?

State Pension Age is currently 66. Under existing legislation, it will increase to 67 by April 2028 and 68 by April 2046.

(You can check your own State Pension Age under existing legislation here.)

Why might State Pension Age change?

Under Section 27 of Pensions Act 2014, the government must regularly review State Pension Age.

The last review was published on 19 July 2017, and the next review is due within 6 years of that date.

When the concept of a regular review of State Pension Age was first proposed, the then Chancellor stated:

“We think a fair principle is that, as now, people should expect to spend up to a third of their adult life in retirement.”

On this basis, the regular reviews of State Pension Age instituted a link with longevity – if people were expected to live longer, then State Pension Age would increase in response. The aim was to ensure that state pension benefits remained affordable in the long-term,

As part of each review, ministers must obtain a report from the Government Actuary on “whether…a person who reaches pensionable age within a specified period can be expected to spend a specified proportion of his or her adult life in retirement, and if not, ways in which the rules might be changed with a view to achieving that result”.

An important change was introduced in the first review of State Pension Age. When commissioning the report from the Government Actuary, the minister asked for an additional scenario besides “up to a third of adult life in retirement” to be modelled.

The minister also asked the Government Actuary to model a scenario of 32% of adult life spent in retirement. This new scenario would imply much higher State Pension Ages in the future (68 by April 2030, 69 by April 2042 and 70 by April 2056).

Ultimately, the government did not adopt this alternative approach for the first review of the State Pension Age. It announced its intention to increase State Pension Age earlier than implied by the “one third” scenario (by April 2039 – though this change was not legislated for) and also stated that it would aim to use the scenario of “up to 32%” in the long-run.

What impact might the current review of State Pension Age have?

Unlike for the first review of State Pension Age, the government has refused to release the letter it sent to the Government Actuary to commission his report.

Therefore we do not know what long-term scenarios for the proportion of adult life over State Pension Age that it is looking at.

We do know what the results of the Government Actuary’s report would look like if the government kept to the 32% scenario it moved to after the first review though.

This is because we know how much longevity has declined by since then (expected improvements in mortality have been tailing off for some years – including before the pandemic – indeed mortality has actually been declining in some parts of the country).

On the basis of updated mortality projections and a scenario of 32%, State Pension Age would not have to increase to 68 until the mid-2050s (ie later than under current legislation – implying State Pension Age would fall for some people).

If State Pension Age should fall for some people why are there reports about increases?

We must presume that reports about the results of the State Pension Age review implying increasing State Pension Age for some people have some basis in fact and are not entirely speculative.

If the latest (unpublished) iteration of the review is looking at increases in State Pension Age, then this must be because either (a) the government has lowered the threshold for the proportion of adult life spent over State Pension Age (again) from 32% and / or (b) the government has introduced other criteria for assessing State Pension Age (such as affordability).

In the Autumn Statement last November, the Chancellor stated that:

“The Secretary of State for Work and Pensions will publish the government’s review of State Pension Age in early 2023. The Review will need to carefully balance important factors, including fiscal sustainability, the economic context, the latest life expectancy data and fairness both to pensioners and taxpayers”.

This statement clearly puts life expectancy as only one (and not even the first) of a number of factors to consider. Fiscal sustainability and the economic context could be used as reasons for increasing State Pension Age even in the face of falling longevity.

The factor of “fairness both to pensioners and taxpayers” is interesting (and not just for the implying that pensioners are not also taxpayers). If it really means fairness to current and future pensioners, then it remains to be seen how the government might reconcile its policy of increasing state pension in line with the triple lock for current pensioners (which will have an impact on fiscal sustainability) while also potentially increasing State Pension Age for future pensioners (because of fiscal sustainability).

What might the increase in State Pension Age be?

Clearly we do not know as the government has not published any of the details of the State Pension Age review that we would normally expect to see by now.

However, the reporting we have seen implies that the increase to 68 will come in as early as 2035 (it is not entirely clear whether the increase would start then or finish by then).

This implies that State Pension Age would increase from 67 to 68 for people aged between about 45 and 54 (with everyone else’s State Pension Age remaining the same for now).

Will this increase actually happen?

This is not clear. After the first review of State Pension Age, the government announced its intention to bring forward the increase in State Pension Age to 68 but it did not introduce legislation to implement this.

Simply stating that it intends to increase State Pension Age has no effect. State Pension Age will only change if legislation is passed by Parliament. It is not entirely clear that this government will want to bring forward such legislation relatively late in its term, or that it can secure parliamentary majorities for its plans.

What will Prospect and Bectu do about this?

We have written to the Work and Pensions select committee to ask members to question ministers and officials about the basis for their review of State Pension Age (in particular the scenarios that were commissioned from the Government Actuary).

When the review is published we will ensure members are aware of the potential impact and work with other trade unions and the TUC to influence the next steps.

What about the link to Normal Pension Age in public service pension schemes?

This is a particularly important point. When the link between Normal Pension Age and State Pension Age was established in the reformed public service pension schemes it was meant to act as a hedge against longevity (ie as members lived longer, Normal Pension Age would increase in order to control costs).

If government is no longer linking State Pension Age to longevity then the purpose of the link to Normal Pension Age in these schemes is removed (indeed the link becomes counter-productive).

Consequently, there is a strong argument to break this link for the future and this is a further issue that we will be pressing along with other trade unions and the TUC.