In the Autumn Statement, the Government repeated that people reaching State Pension Age should expect to spend “up to one third” of their adult life in receipt of State Pensions.
An accompanying DWP paper provides the new information that State Pension Age will start rising two years before this percentage would otherwise be expected to reach 33.3%. It will then increase by one year over a two-year period.
Towers Watson’s analysis of the formula described by DWP suggests that the target percentage is expected to vary between around 32% of adult life (straight after each increase in State Pension Age) and around 33% (immediately before each increase). If the target was for the proportion to be 33.3% at all times, the State Pension Age would not be expected to reach 68 until the late 2040s, when it is now expected to reach 69. As this illustrates, the State Pension Age review mechanism in the Pensions Bill has always meant that precisely where the target percentage was set would make a big difference to how quickly the State Pension Age goes up.
The ONS life expectancy projections to be used in the first formal review of State Pension Age will not be published until late in 2015, so any statements about how quickly the State Pension Age will increase can only be indicative. Indeed, it appears that the Government has not yet been able to take account of ONS mortality assumptions that will be published next week and has used assumptions published two years ago to estimate how quickly the State Pension Age might go up. Without revisions to these assumptions, Towers Watson estimates that the formula described by DWP would see the State Pension Age increase:
• From 67 to 68 between 2033 and 2035 (the DWP says it expects State Pension Age to start increasing in the “mid-2030s”; our calculations suggest 2033 but it would only take a very small change to make this 2034)
• From 68 to 69 between 2046 and 2048 (the Government says it expects this change in the “late 2040s”), and
• From 69 to 70 between around 2059 and 2061, affecting people in their early 20s today.
When new ONS assumptions are published on 11 December, these estimates will need updating. We do not expect these to point to significantly higher life expectancy, and they could suggest lower life expectancy for some groups.
Impact on individuals
David Robbins, a senior consultant at Towers Watson, said:
“People in their 20s and 30s have very little certainty about what State Pension they will get and when they will get it. That was true before the Autumn Statement and it is true after the Autumn Statement. To believe otherwise, you would have to think that politicians will make no further policy changes for several decades and that the ONS can infallibly predict what will happen to mortality rates in future.
“Despite claims that the new single-tier pension will provide a firm foundation on which to save, no one who is still decades away from retirement should bank on getting any particular amount at any particular time. However, the longer that people have to wait to start claiming their State Pension, the more credible it is to suggest that they will eventually receive a weekly income at a reasonable level.
“In theory, the faster increase to 68 means that roughly 7 million people have just lost 12 months’ worth of State Pension – around £7,500 – that they might have received in 25 years or so, with a further 1.5 million losing less than 12 months’ worth. In practice, even some of the people who notice will shrug their shoulders and say they weren’t really expecting this money anyway. With the State Pension system having been made more expensive just before the financial crisis, it’s no surprise that this is being pared back – and there were few vocal complaints when the Government unveiled a single-tier State Pension that cuts weekly State Pensions for younger workers.
“For many employees in public sector pension schemes, benefits accrued after 2015 are expected to be payable in full from the member’s State Pension Age. A faster State Pension Age increase should therefore deliver some savings in public sector schemes too.”
State Pension Age review mechanism
Matthew Fletcher, a senior consultant at Towers Watson, said:
“The focal point of each review is a target percentage of adult life for people to spend in retirement, and it has always been obvious that Governments could adjust this to get the State Pension Age timetable they would like to see.
“People’s State Pension Ages are expected to be fixed at least ten years in advance and, even without this notice period, it would be uncertain how long they will live for after they start claiming. Any set of assumptions about this will be open to debate. For example, it looks as though the ONS numbers to be published next week will assume a rapid bounceback in mortality improvements following the worse-than-expected death rates seen recently. The ONS also assumes faster future improvements in mortality rates at the oldest ages than most pension schemes do. If the ONS numbers are being used to determine State Pension Ages, they should be very clear about the assumptions they are making and why these have been selected.
“The formula described by DWP provides for the State Pension Age to rise if life expectancy improves but not for it to fall if life expectancy comes down. However, future governments are free to change the target so they can cross that bridge if and when they come to it.”
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