Measures used by the government to decide future rises in the state pension age (SPA) have been deemed too optimistic, as a separate analysis suggests the rising costs of life expectancy could require a SPA as high as 80 years old in future.
Concerns that the current SPA analysis is unrealistic follow the launch of an independent report by the government to help decide whether to accelerate plans to raise the state pension age to 68.
The independent report, launched on Monday 21 July alongside the revival of the Pensions Commission, will look at whether the SPA should be automatically linked to life expectancy. It will also assess issues of fairness between different generations, regions and demographics. The findings, due in 2027, will form the basis of the third review of the SPA.
Currently, the SPA is 66 years old and is scheduled to rise to 67 between April 2026 and April 2028. A further statutory rise to 68 years old is scheduled to take place between April 2044 and April 2046, but this is under review, and depending on the report’s findings could come in at an earlier date.
However, Jack Carmichael, associate and senior consulting actuary at Barnett Waddingham, said the forecasts for the costs of the SPA, set out by the Office for Budget Responsibility, are too optimistic and “don’t go far enough in showing the financial risk” to the public purse. He believes that the current models underestimate how long people will live, which means they may collect the state pension for longer than expected.
He explained that the OBR’s ‘Fiscal risks and sustainability’ report shows the cost of SPA as a proportion of GDP doubling over the next 50 years, driven by a growing retirement population relative to the working age population.
“The OBR’s modelling uses a high life expectancy scenario, based on the Office for National Statistics’s definition in their population projections, that results in an additional annual state pension cost of around £2bn in today’s terms. It assumes a long-term rate of 1.9 percent, rather than 1.2 percent. In reality, that sensitivity is too cautious and broad-brush, which underplays the degree of longevity risk in the state pension system.
“A more cautious approach would be to assume a closing of the life expectancy gap between the individuals with the lowest and highest life expectancy. Not only does this more accurately capture the financial impact of longevity risk in the UK state pension system, it is also more likely to reflect healthcare spending priorities over the next 50 years if those living the longest at the moment are assumed to have almost reached the life expectancy cap.”
Carmichael said: “Under this alternative life expectancy sensitivity, the annual cost of the state pension would increase by around £8bn – four times higher than the current model predicts. To keep the cost of the state pension at a similar proportion of GDP would then require a massive increase in the SPA, potentially up to the dizzying heights of age 80.”
