Advertisement

State pension age plan shelved as life expectancy falls

Jeremy Hunt
Jeremy Hunt

The Government is preparing to shelve a planned rise in the state pension age, as a decline in life expectancy leaves ministers struggling to justify the change.

Jeremy Hunt is preparing to delay a decision on when to increase the state pension age to 68, The Telegraph understands.

The state pension age is currently 66 and will rise to 67 between 2026 and 2028. It is scheduled to rise to 68 by the mid-2040s, but Mr Hunt had been hoping to bring this forward, as recommended by an independent review in 2017.

However, Whitehall insiders said there was an “emerging consensus” among the key cabinet ministers that the decision should be postponed until after the next election.

Pushing a decision to the other side of the general election, which is widely expected in 2024, could have political benefits for the Tories as they seek to overturn a major poll deficit.

Older workers in their 50s are a core bloc of traditional Conservative voters that the party cannot afford to alienate.

Bringing forward changes in the state pension age risks frustrating this group, given that changes are likely to impact their near future.

Steve Webb, former pensions minister and partner at LCP, said: “In many ways, people in their 50s are probably your swing voters. Upsetting people in their 50s is probably not what you want to do just 18 months before an election, especially if you don’t get any money until the 2030s.”

Bookmakers widely expect Labour to defeat the Tories at the election given opinion polls have put the party more than 20 percentage points ahead of their rivals.

Bringing forward the increase could also trigger a rebellion amongst Tory MPs, Mr Webb said.

He said: “They might not even get it through, their own backbenchers might say ‘I’m not voting for that’.

“George Osborne once said that it is relatively easy to raise money by raising the pension age as long as it’s far enough away. But I think people are much more aware than they were.”

Eight years ago, John Cridland advised the Government to raise the state retirement age to 68 between 2037 and 2039. He suggested increases should be linked to rising life expectancy, helping to justify the rise.

However since then, British life expectancy has unexpectedly dropped. It was lower in 2021 than in 2011, according to the Office for Health Improvement and Disparities.

This outturn has undermined the Government’s logic for pushing out the retirement age and left the Chancellor struggling to justify the political cost of the policy.

It is understood that the final decision on the Government’s approach to the state pension age has not been made, meaning changes to the policy remain possible and the Chancellor may still opt to announce an increase in the state pension age.

There is no immediate need to announce when any changes will come into effect, despite months of internal discussions preparing to reveal the policy.

Baroness Neville-Rolfe has submitted a new independent review of the state pension age and the Government has a May deadline to publish and respond to her recommendations.

The Conservatives have long promised to give the public 10 years notice before the age rise comes into effect, after David Cameron faced a backlash to the way he handled changes to the retirement age.

The Tories still have plenty of time to meet that commitment if the new date at which the state pension age rises is picked to be the mid- to late-2030s.

The 2017 review was based on data from 2014. The unwinding of the life expectancy argument for raising the state pension age began before the pandemic but was accelerated by the onset of Covid.

Mr Webb said: “In 2018, life expectancy at retirement had dropped by two years compared to in the last review. It is not just that we are living less long, it’s that all of the improvements they had baked in the last time just didn’t happen.”


How the pandemic blew up Jeremy Hunt’s plan to raise the state pension age

By Eir Nolsøe and Melissa Lawford

Across the English Channel, angry mobs are setting streets alight in protest over Emmanuel Macron raising the retirement age by two years to 64. In Britain, the roads remain free of burning rubbish, but a politically toxic debate over the state pension age could yet ignite.

Baroness Neville-Rolfe in September last year completed an independent report reviewing the state pension age in Britain. The Government is yet to publish it, along with another report from the Actuary’s Department, and a final document detailing its proposals.

The opposition is accusing the Tories of keeping vital information from the public and preventing a crucial debate.

Jeremy Hunt seemingly hoped to have technocratic cover to depoliticise the decision. But the pandemic has thrown a spanner in the works. Covid reversed a decade of gains in life expectancy, making it harder to justify a later state pension.

Yet with a General Election on the horizon and public finances in dire straits – with the tax burden already at a post-war record – the Chancellor is under pressure to find ways to balance the books. His predicament is unenviable and prompting mounting speculation that any decision on the state pension age will be pushed out beyond the election.

Under the Government’s current plans, retirements will rise to 67 years between 2026 and 2028. The next rise, to 68, is due by the mid-2040s, but Hunt reportedly wants to bring this change forward to the end of the next decade.

This was already recommended by John Cridland in an independent review back in 2017.

He advised the Government to raise the state retirement age to 68 over the two-year period 2037 to 2039.

It means that millions born in the 1970s and later would be told to work for longer. But the incentive to impose the change is significant for the Treasury.

Increasing the state pension to 68 would bring in up to £10bn a year for the Treasury through the 2030s and 2040s, estimates Carl Emmerson, deputy director of the Institute for Fiscal Studies, a think tank. This would be equivalent to 0.4pc of GDP – nearly double the 0.25pc windfall when the Government raised the state pension age from 65 to 66.

If the Chancellor raised the state pension age to 68 in 2037 rather than 2045, this would therefore be worth up to £80bn over the eight year period.

Britain’s ageing population and the triple lock – which rules that the state pension must increase by the largest of inflation, wage growth, or 2.5pc – means the benefit to the Treasury would swell over time. By 2060, having the state pension age at 68 would be worth £12.5bn a year to the Treasury, says Emmerson.

But there is a big problem. The logic for increasing the state pension age was to bring it in line with rising life expectancy. Now, the pandemic has blown this logic out of the water.

The pandemic cut a year off the average female life expectancy and 1.3 years off male life expectancy – down to 82.6 and 78.6 years respectively in 2020. This was the largest drop in life expectancy since the Second World War.

After the Covid slump, there has been little improvement. Early data from the Office for Health Improvement and Disparities shows life expectancy in 2021 was almost unchanged. This means UK life expectancy was still lower than it was in 2011.

Analysts do not expect a big bounce back as the UK is now grappling with the long-lasting toll of the pandemic on its health services.

“The challenge going forward, especially in the next five years, will relate to the pressure on the NHS – solving the problems of backlogs and pressure on staff,” says Joseph Lu, director of longevity science at Legal & General.

As of September 2022, 7.2 million people were on NHS waiting lists – a record high. Back in 2019, around 1,000 people were waiting for more than 52 weeks for treatment. Now, that number is more than 400,000. “I suspect there will be people who may not be able to work for an extra two years because they will be ill,” says Lu.

But the problems with life expectancy and long-term health long-predate the pandemic, says Veena Raleigh, senior fellow at the King’s Fund, a healthcare think tank.

Life expectancy growth had effectively plateaued in the years leading up to 2020, says Raleigh. “We started to see rising levels of obesity and so on. Our life expectancy virtually stalled in the decade,” she says.

The data unwinds the headline argument for increasing the state pension age. “Cutting costs would be the only reason to press ahead with accelerating the state pension age,” says former pensions minister Baroness Ros Altmann.

“Until recently, I believe the Government was very keen to press ahead with accelerating the rise in the state pension age, but it may be rethinking,” she adds.

To press ahead would be a political minefield. “Any cost savings will not arise until after the next election, whereas if there is a decision to increase state pension faster, the political downside cost could be immediate,” says Baroness Altmann.

The Government seems to be dragging its feet. Since the Cridland review, another independent review has been submitted by Baroness Neville-Rolfe. By May, Rishi Sunak’s Government needs to set out its proposals and publish them. But the Government has so far been silent.

It is preventing crucial debate and keeping the public in the dark about which changes might be on the cards by not releasing the independent review it received in September sooner, says Work and Pensions Committee (WPC) chair, Sir Stephen Timms.

“I don't understand why they've sat on it for six months now, without publishing it when there ought to have been a wider public debate,” the former Labour Shadow Secretary for Work and Pensions says.

“The life expectancy expectations are at the moment going backwards. So it's hard to see what the case would be for accelerating the increase in the state pension age,” he adds.

Tinkering with retirement ages tends to bring on a politically explosive debate, as the one that is playing out on the streets of Paris currently.

To avoid upsetting voters every few years, countries are increasingly moving towards linking the state retirement age with longevity predictions.

Seven countries in Europe including Denmark, Finland and Estonia have already adopted this model partially or fully, meaning changes happen automatically or as default but will still be debated in Parliament.

Portugal, which is one of the countries, has even lowered its state retirement age by three months in response to life expectancy taking a hit from the pandemic.

Overall, such a model is seen to be fairer across cohorts as it takes a gradual and consistent approach.

One considerable benefit tends to be cost-effectiveness, says Andrew Reilly of the OECD.

“It helps with the sustainability of the system,” he says. “Pension systems are going to be under increasing pressure as populations age and the working-age population is shrinking.”

This means that either the retirement age, the accrual rate or contribution levels have to change – or all three, he says.

“It would be better I would have thought in terms of UK politics if the political emphasis from it can be taken out… where this is a recommendation coming through from regulators or independent authorities as opposed to being a Labour or Conservative stance,” says Reilly.

A Government spokesman said: “The Government is required by law to regularly review the State Pension age and to consider, based on a wide range of evidence including latest life expectancy data and two independent reports, whether the rules around State Pension age remain appropriate. The next review will be published by 7th May.”