‘Radical reforms to State Pension system proposed as government battles rising bills’ – LCP

LCP proposals include: 

• Setting the State Pension Age so that people can expect to get a pension for 20 years on average. Under this policy, future increases in life expectancy feed through 100% into the size of the working age population, making the system more sustainable; and 
• Introducing a new “guaranteed period” for the State Pension of five years, ensuring, for the first time, that everyone who reaches State Pension Age will get something back for their contributions. This provides protection to those with lower life expectancy, as State Pension Age increases. 

Experts specialising in State Pension policy and in demographic trends at pension consultancy LCP have joined forces to recommend major changes to the State Pension system in a paper published today. LCP’s ideas have been fed into the Government’s review of the State Pension Age, and would help to square the circle between the need to increase pension ages and the need to avoid penalising those whose life expectancy is much lower than average.

One key measure used by the Government to assess the sustainability of the State Pension is the proportion of adult life people are spending in retirement (i.e. above State Pension Age).

The LCP paper shows (see chart) that this proportion has been going up, especially given the lack of upward movement in State Pension ages for the whole of the 20th Century. For example, over the course of the 20th Century, life expectancy for young adults rose by 17 years, but State Pension Age did not rise at all. 

This upward movement in the length of retirement has only been checked by the equalisation of retirement ages (increasing women’s pension age to 65 between 2010 and 2018), followed by the move (for men and women) to 66 in 2020. However, retirement lengths have already started growing again. 

The Government’s original plan was to set State Pension ages so that people could expect to spend up to one third of their adult life in retirement, but the analysis shows that this would be historically unprecedented, once equalisation of State Pension Age is allowed for. LCP argue that ‘locking in’ at these historically unprecedented levels is unsustainable. 

Instead, LCP argue that the best way to put the State Pension funding on a firmer footing would be to set SPAs so that people could, on average, expect to receive a pension for a fixed period, such as twenty years. This means that as life expectancies improve, retirements will stay the same length, but working lives will gradually lengthen, thereby making the system more affordable. 

However, if this approach were adopted, some people in parts of the country with low life expectancy could find that they only received the State Pension for a few years, hitting them harder than those in longer-lived areas. 

In response to this, LCP also proposes the radical idea of having a “guarantee period”, i.e. a minimum payout for State Pensions. This would mirror the way that private sector annuities work, with minimum “guarantee periods” being the norm. 

Under the LCP proposal, anyone reaching State Pension Age would be guaranteed that they – or their estate – would receive five years’ worth of payments. This would not add greatly to the cost of the system (because most people who retire draw a pension for at least five years in any case) but would focus protection on the most deprived groups with the lowest life expectancy. This, in turn, would make it easier to justify a faster schedule of State Pension increases to make the system as a whole more sustainable. 

LCP notes that there may also need to be corresponding reforms to working-age bereavement benefits so that those who never reached pension age would also get ‘something for something’.