Could you be affected by the decision not to change State Pension Age?

Prospect pensions officer Neil Walsh looks at the government’s recent review of the State Pension Age.

As this is a fairly long blog, I’ll give you the TL;DR upfront:

1. On 30 March the government published its review of State Pension Age. It did not propose any changes to when people become eligible to receive the State Pension.
2. But there were some significant developments, that could impact millions of people in the future, that it is important to be aware of.
3. Firstly, the government seems minded to reduce the proportion of adult life you can expect to be in receipt of State Pension (from 32% to 31%). So, the increase to 67 will not be deferred and the increase to 68 might be brought forward rather than put back.
4. Secondly, the government also seems minded to introduce an additional metric for assessing State Pension Age: affordability. This could see increases to 69 and 70 for people in their early 40s and below and the abandoning of the triple lock for everyone.
5. But the government deferred making any actual decisions (except to confirm the increase to 67 between April 2026 and April 2028) so none of the above proposals are going forward for now, decisions will be made by whoever forms the next government.

What has been decided?

Back in February I wrote about the impact that an increase in State Pension Age could have on Prospect and Bectu members.

That blog was motivated by speculation that followed an apparent leak to the Sun that the government intended to bring forward increases to State Pension Age.

At the time I wrote that there were doubts that the government could follow through on such plans:

“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.”

Indeed, by mid-March, the latest leaks (this time to the FT (£)) stated that ministers had gotten cold feet and would delay any increases.

When the government finally published its review of State Pension Age on 30 March, this confirmed its decision to make no actual decision about when to increase State Pension Age.

What does no decision mean?

The decision not to legislate for any changes to State Pension Age means that the current statutory timetable remains in place.

This will see State Pension Age increase from 66 to 67 between April 2026 and April 2028 and from 67 to 68 between April 2044 and April 2046 (you can find your State Pension Age here).

But certain announcements in the review, if followed through in the future, could have significant implications for members and it is important to understand what these could mean.

The context for the review of State Pension Age

Two hugely important, and very depressing, trends are key to this review: (1) we are expected to die sooner than previously and (2) we are expected to be much poorer than previously.

Following a recent appearance before the Work and Pensions select committee, the Government Actuary wrote to the committee to summarise the extent to which life expectancy had fallen.

It is important to note that the above results only show that the historic rate of improvement in life expectancy has slowed dramatically, rather than gone into reverse.

However, given the wide inter (and intra) regional variations, there will almost certainly be many areas of the country where life expectancy has actually fallen on some measures.

On top of lower expected improvements in life expectancy, there is also expected to be much lower long-term economic growth.

The OBR’s latest long-term fiscal projections published last July assumed average long-term real economic growth of just 1.4% per annum. This compared to 2.2% in the 2018 projections.

The difference between 1.4% and 2.2% may not seem very significant, but compounded over decades it makes a huge difference to our expected future income.

The main reason for the downgrading of expected economic growth is a significant reduction in long-term productivity growth, reflecting recent trends.

The implication of being poorer in the future is that everything (including the State Pension) will be relatively more expensive as a result.

How should State Pension Age change under the current approach?

In the previous blog, I explained that the principle underpinning the State Pension Age reviews was that people should be able to expect to receive the State Pension for the same proportion of adult life as previous generations.

Initially the government proposed a proportion of “up to a third” of adult life. The recommendation of the first State Pension Age review was that the proportion be changed to 32%.

But if life expectancy is not improving as much as expected, and we can expect to spend the same proportion of adult life in receipt of State Pension, shouldn’t State Pension Age increases but put back?

Well, yes, in line with the table below:

These results show that the government’s previous principles would mean postponing the upcoming increase in State Pension Age to 67 by over a decade (and the increase to 68 by nine years).

This would result in a lower State Pension Age for many millions of people (including many who are approaching retirement or who are even already retired!)

Why won’t State Pension Age increases be deferred?

The government has not made many actual decisions about changes to State Pension Age. One decision it has made, is to stick to the current timetable for the increase to 67.

It may not seem like it, but this is actually a decision to abandon the previous principle for setting State Pension Age. If the concept of allowing people to spend 32% of their adult life in receipt of State Pension Age was retained, then the increase to 67 should have been deferred.

In relation to other potential changes, the government has simply said it believes there should be a further review within two years of the next Parliament (in practice the timing of the next review will be decided by whoever is Secretary of State in the next Parliament).

However, it is obvious that this government’s new approach would also have implications for when State Pension Age increases to 68 (and potentially 69 or even 70).

There are two reasons why the government will not simply follow the results of the current approach (32% of adult life in receipt of State Pension): (1) it wants to revise the percentage of adult life in receipt of State Pension down again and (2) it wants to set a new parameter around the affordability of State Pensions.

Moving the goalposts again

In the last review, the government changed the basis for setting State Pension Age from “up to a third” of adult life in receipt of State Pension to 32%.

For this review the government commissioned the Government Actuary to consider two further proportions: 31% and 30%. Results on these bases are set out in the table below:

Clearly either of these bases would result in radically worse outcomes for millions of current workers.

The government has not expressed a preference for setting a different percentage for future reviews but: (1) it’s decision to keep to the current timetable for the increase to 67 is consistent with 31% and (2) its independent reviewer recommended adopting “up to 31%”.

Introducing new goalposts

As well as changing the old goalposts (again), the government also seems set on introducing a new factor for assessing changes to State Pension Age: affordability.

The terms of reference the government gave the independent reviewer of State Pension Age gave a clear steer that “additional or alternative” metrics should be taken into account.

They stated that: “In conducting analysis and reaching conclusions, the independent report should have regard to both the sustainability and long-term affordability of the State Pension.”

In his report, the Secretary of State said that: “The State Pension age is therefore an important lever in ensuring the sustainability of the State Pension system and the public finances.”

Clearly, the government did not go as far as to specify an actual affordability limit, much less State Pension Age changes to meet such a limit, but the independent reviewer did.

The independent reviewer recommended that the government sets a limit on State Pension related expenditure of up to 6% of GDP. This could have significant implications.

Can we pass an affordability test?

The table below gives the OBR’s latest projections for the cost of the State Pension (and related benefits) expressed as a percentage of GDP.

The cost of the State Pension is expected to increase significantly over time.

The main reason for this is the old-age dependency ratio (the number of people over State Pension Age per 1,000 people of working age) is projected to grow (by 2070 there are expected to be 5 million more pensioners but only 1 million more people of working age).

One way of offsetting the impact of a worsening old-age dependence ratio is to grow the economy, but we have already seen that productivity is assumed to remain lower in the future and this makes any given level of State Pension expenditure much less affordable.

So, on the basis of the latest demographic and economic projections, spending on the State Pension is expected to greatly exceed the 6% of GDP limit proposed by the independent reviewer.

What does failing the affordability test mean?

The government has ducked making any decision about future changes to State Pension Age for now. So, there are no immediate consequences to breaching this measure of affordability.

But it is possible to say what the consequences of adopting a measure of affordability at this level would be, they are clearly set out in the review:

1. Increasing State Pension Age sooner;
2. Making the eligibility rules for State Pension more stringent (eg more than 35 years needed for a full State Pension);
3. Reducing the generosity of the State Pension (eg no longer uprating the State Pension in line with the triple lock.)

A combination of the above could be implemented to try to keep spending on the State Pension below the proposed affordability limit.

It is important to point out that it would be for a future government to set its own metrics for assessing State Pension Age and to propose changes that were in line with those (that in turn would be subject to Parliamentary approval).

This means that none of the proposals set out in this review might ever see the light of day.

However, it is important to note that the direction of travel of the review would see fundamental changes such as State Pension Age of 69 or 70 for millions of workers (in their early 40s or below) and / or the abandonment of the triple lock policy for uprating the State Pension.