Tom Selby, head of retirement policy at AJ Bell, comments on the government backing away from plans for a pre-election state pension age hike.
He said: “Accelerating the planned hike in the state pension age for millions of Brits would have raised billions of pounds for the Treasury, but it would also have been deeply unpopular and might well have cost the Conservatives the next general election.
“It would arguably have been viewed as unfair too, given the dramatic drop in average life expectancy we have seen in the wake of the pandemic, as well as the significant scaling back of future life expectancy growth projections.
“Going into a plebiscite telling voters they are living less long than previously thought and yet will have to wait longer for their state pension would have been a challenging sell on the doorstep to say the least. You only need to take a look over the Channel for an example of just how controversial changes to state pension age can be, albeit the system in France is not directly comparable to the UK.
“This is so blindingly obvious it is hard to escape the feeling we have all been played, with the government floating expectations of a faster state pension age rise, only to row back on the supposed ‘plans’ – much to the relief of those who might have been affected. Such cynical policymaking may well be effective, but it also risks undermining people’s confidence and trust in the wider pensions system.”
What has been happening to life expectancy in the UK?
“For decades, average life expectancy across the UK had been growing at a rapid rate. At the beginning of the 1980s, average life expectancy at birth was around 71 for men and 77 for women.
“By 2017-19, average life expectancy had reached a record high of 79 for men and 83 for women. However, between 2018-20 average life expectancy for men dipped marginally, in part as a result of the pandemic.
“Expectations of future life expectancy increases have also plummeted. For example, back in 2014 the ONS thought that by 2028 – when the state pension age will rise to 67 – the average life expectancy for a 67-year-old man would be 21.1 years, while for a woman it was expected to be 23.1 years.
“However, the latest projections suggest that by 2028 the average life expectancy of a 67-year-old man will be 18.7 years, while for a 67-year-old woman it will be 20.8 years.”
Source: AJ Bell analysis of ONS data – Expectation of life, principal projection, UK – Office for National Statistics (ons.gov.uk)
The great life expectancy divide
“The DWP’s state pension age review, due to be published by May, will not just look at averages – it will also consider life expectancy trends ‘in every part of the UK’.
“One of the major challenges when designing state pension policy is balancing simplicity with fairness. The flat-rate state pension introduced in 2016 aims to simplify the benefit people receive over the long-term, while the state pension age remains universal.
“As such, the government has very much gone for simplicity over fairness, with the aim of creating a state pension system which savers can understand and use as a foundation for their retirement plans.
“The downside of this approach is it does not take account of the yawning differences in life expectancy that exist in the UK.
“For example, official data suggests men living in the most deprived areas of the country live almost 10 years fewer than men living in the most prosperous areas. For women, the difference is almost eight years – and both sexes have experienced ‘significant increases’ in the inequality of life expectancy at birth since 2015-17.
“The gaps in healthy life expectancy are even more staggering, standing at around 19 years for both men and women.
“There are ways this could be addressed, but each comes with significant challenges. Means-testing could make the system fairer but would add unwelcome complexity, not to mention administrative cost.
“Allowing earlier access to the state pension, potentially at a reduced rate, would at least allow those who may have limited life expectancy to access some of their state benefit sooner.
“However, one of the dangers here would be that people might end up short on cash, particularly in their later years, if any private pensions run out and they’re left with only that lower state pension income. From the Treasury’s perspective it could also present short-term cashflow challenges.
“Another idea that has been floated would see people entitled to access the full state pension after reaching a certain number of years’ National Insurance contributions. The thinking here is that those who are more likely to start work when they are young are, on balance, more likely to have manual jobs they may struggle continue with when they are older.
“Some of these ideas have merit, but none are perfect and each would make messaging around the state pension more complicated. They also entail a major overhaul of the state pension system, which would inevitably be controversial.”