This took me back to an article that I wrote a couple of years ago when we started to see an attempt to apply some sort of logic and consistency to setting the SPA. At that time, the Pensions Policy Institute had suggested the starting point must be for policymakers to decide for how much of an individual’s total adult life they should be in receipt of the state pension.
In their research they showed that, in 1981, individuals received the state pension for 25% of their adult lives, but with longevity changes this had increased to 30% by 2000 and by 2010 to 33%.
PPI calculations suggested that, to keep the proportion of adult life in receipt of the state pension at 2010 levels, the SPA would need to be 66.5 by 2030. To keep it at the 2000 level of 30%, the SPA would have to rise to 68 by 2030, and to maintain it at the 1981 level of 25%, the SPA would need to rise to 72 by 2030.
It seems that this has been considered a realistic approach, and we now appear to have a formula for future increases. Forgive the techy bit for a minute, but it is probably worth including the theory for completeness. The equation is:
Proportion of adult life spent in receipt of State Pension = (Life expectancy at SPA) / (Life expectancy at SPA + SPA – adult life starting age)
This may seem simple enough, but there are a number of other assumptions to be made. The Government will use 20 years old as the appropriate starting age, and life expectancy figures published by the Office for National Statistics will be used for life expectancy. The other assumption to even-out the difference in longevity between males and females will be to use weighted figures for the different numbers of men and women in the population.
The consultation also confirms that the aim is to give people at least ten years’ notice of a future change. In 2011 the ONS published a report titled ‘What are the Chances of Surviving to Age 100?’, and some of the headlines from that report were quite startling:
In 2013 updated statistics confirmed that:
The Pensions Bill 2013 already makes provision for the increase in the SPA to 67 to be brought forward to between 2026 and 2028. An increase in the SPA to 68 will come into force from the mid-2030s, and a further increase to age 69 will apply from the late 2040s.
So, it appears that we will all have to work longer and the headlines predicting a pension age of 70 or 80 might at least now have some form of objective logic. If we add this to the reforms in the state pension then we can probably sum it all up by saying we will have to work longer for less in retirement!
The importance of saving and making private pension provision is emphasised if the idea of earlier retirement is to be a reality.
There will always be a few issues to overcome, such as:
This is an important line in the sand, allowing private individuals to plan for retirement with some of the politics taken out!
Mike Morrison
Head of Platform Technical
AJ Bell