UK pensions industry calls for reform of state pension

In a call to reform the UK state pension, the Institute for Fiscal Studies (IFS) said the government should state what it believes to be an appropriate level for the new state pension relative to earnings.

The UK’s state pension currently stands at 30% of median full-time earnings, which is its highest share since at least 1968, IFS said, however it is still less generous than pensions provided in many other advanced economies that have much more limited provision of private pensions.

IFS said that having set a target, the government should then legislate a pathway to meet it with a specific timetable. It added that in choosing the level of the new state pension, the government has to consider the trade-off between higher income for pensioners and the cost to the public finances.

It said that the current state pension has “many strengths”, including its simplicity. But it said the Pension Review indicates several problems, including no indication of what level pension will reach or when.

‘Triple lock’ provides neither future pensioners or the government with any certainty regarding the level of state pension, it said. Adding that many younger people have little confidence in the continued existence of the pension, and decisions over increasing state pension age are uncertain.

For the long-run direction for the state pension, the Pension Review suggests a new ‘four-point pension guarantee’ to provide greater certainty and confidence over what people can expect to receive from the state pension.

Firstly, it suggests that once the state pension has reached its target level, increases in the state pension should in the long run keep pace with growth in average earnings, which ensures that pensioners benefit when living standards rise.

It also suggests that both before and after the target level is reached, the state pension should continue to increase at least in line with inflation every year and it should not be means tested.

Lastly, it suggests the state pension age should only rise as longevity at older ages increases, and never by the full amount of that longevity increase. To increase confidence and understanding, the government should write to people around their 50th birthday stating what their state pension age is expected to be. Their state pension age should then be fully guaranteed 10 years before they reach it.

IFS said these suggestions are “carefully designed” to build on the strengths of the current state pension system and to address some of the key challenges identified in the Pension Review report.

Challenges

These challenges include the ageing population adding considerable pressure on public finances in coming decades, with current projections showing that by 2050 the number of people above the state pension age will rise by 25% putting pressure on both state pension spending and, to an even greater extent, public spending on health and social care.

Heidi Karjalainen, a research economist at IFS said: “A commitment by the government to a set level of the new state pension relative to average earnings would ensure that pensioners continue to benefit from higher state pensions as living standards rise.”

She said that under IFS suggested guarantee, they would also be protected from falls in their purchasing power when inflation is high or earnings growth is very weak.

She added: “In choosing a target, the government would have to balance carefully the benefits of a higher state pension income, and the cost to the public finances of providing the pension.’

Carl Emmerson, deputy director at IFS, added that the ageing population leads to uncertainty around the long-term sustainability of the system.

He said: “A new way forward is needed to ensure that people can have confidence and certainty over the state pension as a future source of income to help avoid old-age poverty and provide a solid bedrock on top of which they can build private pension saving.”

Leah Evans, former Institute and Faculty of Actuaries (IFoA) pensions board chair said that it is fundamentally important that pensioners are not left behind with a stagnant state pension.

She added: “However, as today’s workers become tomorrow’s pensioners, the challenge for the state pension is that it must remain fair, sustainable, and future proof. The report directly addresses how this can be achieved with recommendations on target levels, longevity considerations, and living standards which build on the strengths of the current system.”

She said that this is a “positive development” in the ongoing public debate on the state pension age and payment levels, however, the state pension alone is “not enough” to provide UK households with comfortable retirement and addressing this pension saving adequacy will require a long-term focus on issues like automatic enrolment, advice and guidance and managing longevity risk.

PLSA’s call for reform

The Pensions and Lifetime Savings Association (PLSA) has also previously called for reform of the State Pension, saying it should be set at a value to protect everyone from poverty in retirement and cover all basic needs.

It recommended that its value be maintained by use of the triple lock, with increases in real terms to continue when affordable until it reaches a new target value of the Retirement Living Standards Minimum Level. Updated each year based on independent research, this is currently £12,800 for a single person or £19,900 for a couple excluding mortgage or rent costs.

Nigel Peaple, director of policy and advocacy at PLSA, said: “Some aspects of today’s IFS proposals adopt a similar approach as they call on the government to set a clear objective for the State Pension, although they suggest that it should be linked to a percentage of median earnings rather than a living standards level, and that it be uprated generally in line with earnings growth while also including a mechanism to protect against high inflation.

“While these proposals are not identical to our own, they do aim to set an enduring and stable settlement and potentially result in very similar retirement income outcomes.”

He added that the proposals “merit careful consideration”.

A spokesperson for Department for Work and Pensions said: “We want to ensure the State Pension remains the foundation of income in retirement for future generations in a way that it is sustainable and fair.

“Thanks to our triple lock promise, the full rate of the New State Pension will rise to over £11,500 a year, and there are currently 200,000 fewer pensioners in absolute poverty than in 2009/10.*

The spokesperson added: “Our recent state pension age review concluded that a universal State Pension age remained the best system, providing simplicity and clarity for people, and we also remain committed to the principle of providing 10 years notice of changes to State Pension age, enabling people to plan effectively for retirement.”

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